Examination of Port Stephens Council Dungog Shire Council Merger Proposal Report to the Boundaries Commission

Transcription

1 Examination of Port Stephens Council Dungog Shire Council Merger Proposal Report to the Boundaries Commission Delegate Peter Peppin August 2016

2 Report to the Boundaries Commission Delegate Peter Peppin July 2016

3 Contents Contents iii 1 Executive Summary Key Findings Major Findings and Recommendation Recommendation to Minister Other Matters for Attention and Consideration 3 2 Introduction Description of Proposal About Port Stephens and Dungog Shire LGAs Description of Examination Process Rationale Summary of Submissions Councils Community 9 3 Finance Analysis Economies of Scale Rating Submissions Conclusion 18 4 Communities of Interest Analysis Submissions Conclusion 25 5 Historical and Traditional Values Analysis Indigenous History Colonial History Volunteering Submissions Conclusion 30 6 Attitude of Residents and Ratepayers Analysis Submissions Conclusion 32 7 Elected Representation 33

4 7.1 Analysis Submissions Conclusion 36 8 Service Delivery Analysis Submissions Conclusion 39 9 Employment Analysis Submissions Conclusion Rural Factor Analysis Submissions Conclusion Wards Analysis Submissions Conclusion Diversity Analysis Submissions Conclusion Other Factors Name of Council Other Merger Proposals Election of Mayor Conclusion Recommendation Key Findings Major Findings and Recommendation Recommendation to Minister Other Matters for Attention and Consideration 55 Appendices 57 A. Instrument of Delegation 57 B. Port Stephens Merger Proposal 59 C. KPMG Financial analysis 61

5 1 Executive Summary 1 Executive Summary The Minister for Local Government, Hon. Paul Toole MP, has referred the Proposal by Port Stephens Council for the amalgamation of Port Stephens and Dungog Local Government Areas (LGAs) to the Acting Chief Executive of the Office of Local Government (OLG) for examination and report under Section 218F of the Local Government Act (the Act). On 2 May 2016, the Acting Chief Executive of the Office of Local Government delegated to me (the Delegate), by Instrument of Delegation, 1 the functions of examining and reporting on the proposal to amalgamate the local government areas of Port Stephens and Dungog Shire Councils. A copy of the Proposal submitted by Port Stephens Council is shown in Appendix B. 2 The Delegate conducted the examination and prepared this report for the Minister and the Boundaries Commission, having had regard to the requirements of Section 262(3) of the Act. 1.1 Key Findings There are differences in the two councils rating structures that will require appropriate harmonising. However, the financial advantages of the merger outweigh the financial disadvantages. Also, the larger council with its bigger rate base will provide the merged council with increased scale and capacity in considering important financial decisions. The Proposal warrants support, with respect to the financial factor. (Refer Chapter 3) The community and geographic characteristics of the two LGAs are similar and strongly aligned. (Refer Chapter 4) Port Stephens and Dungog LGAs have similar traditional and cultural backgrounds. It is considered that the proposed new council provides an opportunity to further develop these values. (Refer Chapter 5) Given the verbal and written feedback from the councils and the public, on balance, there is strong support for the proposal. (Refer Chapter 6) The Delegate believes that, should the merger Proposal proceed, it is important for the mayor, councillors and staff to develop a close working relationship as quickly as possible. To this end, it is considered that a mayor elected by and from among the elected members will facilitate this outcome. Also, having regard to the number of residents/councillor ratios for six other similarly sized NSW Regional City Councils, a council with 12 elected officials seems appropriate. (Refer Chapter 7) 1 The Instrument of Delegation is shown in Appendix A 2 See Appendix B Council Boundary Review Port Stephens and Dungog Proposal 1

6 1 Executive Summary Should the new council be established, to maintain quasi-representation in the more sparsely populated areas of the former Dungog Shire Council, consideration should be given to the formation of a citizen s liaison committee that will have an advisory role to the new council. Also, it is suggested that 2-3 times per year council meetings be held in different villages of the new council to engage with these isolated communities. (Refer Chapter 7) With every change process, there will always be a level of disruption to service delivery, however, a rolling program of service reviews can be expected to deliver a range of services for the new council which are appropriate, effective and efficient. (Refer Chapter 8) A merger will not necessarily lead to a reduction in overall staff numbers, with examples showing that new bigger councils from past amalgamations have embraced the provision of new and/or enhanced services requiring the creation of additional positions. Also, the new publicly advertised positions created through the merger process can be expected to attract very strong fields of candidates. (Refer Chapter 9) The Local Government Act provides employment protection to council staff employed by a newly merged council and also for those working in a rural centre such as Dungog. (Refer Chapter 9) Both Port Stephens and Dungog LGAs have a large proportion of their areas zoned Rural. Also, under Section 218CA of the Act, Dungog township is deemed a rural centre and as such a new council after amalgamation must maintain as far as is reasonably practicable the same level of regular staff in Dungog as were employed prior to the merger. Given the relatively large rural areas of the two councils, it is suggested that the new council, if proclaimed, should endeavour to improve service delivery to isolated areas via a range of modern state of the art tools. (Refer Chapter10) The merits of a ward system as opposed to no wards are often debated across the Local Government sector. In this case, it is considered that in a newly merged council representation should be maximised in the first instance and as such guarantee representation across the new council. Obviously, this cannot be guaranteed under an undivided system. As for the number of wards, given a council comprising 12 councillors and also the legislative requirement for the same number of councillors to be elected for each ward, a new LGA divided into four 3 member wards seems appropriate (Refer Chapter 11) It is clear from the statistical information and the submissions received that the two councils have very similar demographics. This can be expected to assist in implementing the merger, albeit the opinions of the area s diverse communities will need to be collected in determining the services to be provided. A similar community opinion process will need to be followed in the preparation of the Community Strategic Plan. (Refer Chapter 12) 2 Council Boundary Review Port Stephens and Dungog Proposal

7 2 Introduction 1.2 Major Findings and Recommendation This review presents the following major findings in support of its recommendation to the Minister for Local Government: that a merger between the local government areas of Port Stephens and Dungog will derive financial savings for the two councils while the larger rate base can be expected to provide the merged council with increased scale and capacity to consider important financial decisions eg negotiating larger contracts, providing new/better services, addressing infrastructure backlogs, etc. there is a very strong alignment between the two council s community and geographic characteristics and traditional and cultural backgrounds and residents and ratepayers can expect these values to be further developed through the increased scale and capacity of a merged council, and there is strong support from those who lodged a submission Recommendation to Minister That the proposed merger of Port Stephens and Dungog Shire Councils proceed, subject to consideration by the Boundaries Commission and approval by the Minister for Local Government. 1.3 Other Matters for Attention and Consideration Should the merger proposal proceed, this review provides the following matters for attention and consideration by the Minister, Boundaries Commission and the new council: that if the Proposal proceeds, the new LGA comprise of 12 councillors, including the mayor, who will be directly elected by the councillors that if the Proposal proceeds, the new LGA be divided into four 3 member wards, and that if the Proposal proceeds, the new LGA be named Dungog-Port Stephens Regional Council. 2 Introduction 2.1 Description of Proposal This report is for the examination of the proposal made by Port Stephens Council to the Minister for Local Government under section 218E(1) of the Act for the merger of Port Stephens and Dungog Shire (shown in Figure 2.1). Council Boundary Review Port Stephens and Dungog Proposal 3

8 2 Introduction Figure 2.1 Port Stephens and Dungog Shire Councils Source: NSW Government, Council Boundary Review, Port Stephens and Dungog Shire Councils Proposal 2.2 About Port Stephens and Dungog Shire LGAs Port Stephens LGA is the land of the Worimi people, and Port Stephens Council values the unique status of Aboriginal people as the original owners and custodians of lands and waters including the lands and waters of the Port Stephens LGA. Port Stephens is named after Sir Philip Stephens who was First Secretary of the Admiralty in the late 1700s and later a Lord Commissioner of the British Admiralty between 1795 and The Port Stephens Council LGA has an area of 979 square kilometres and is situated within the following co-ordinates : 32o 45 S, 151o 55 E. It is located within the Hunter/Mid North Coast Region of NSW. The council offices in Raymond Terrace are situated 172 kilometres from the Sydney CBD. The following are some important statistics for the Port Stephens LGA: main employing industry retail trade (ABS 2011) other employing industries health care and social assistance, public administration and safety, and manufacturing Council Boundary Review Port Stephens and Dungog Proposal

9 2 Introduction climate mean minimum temperature 12C mean maximum temperature 23C mean rainfall range 1,125.6mm 1,348.9mm national parks, nature reserves, other protected areas 19.3 square kilometres, major population centres Tomaree Peninsula, Tilligerry Peninsula, Medowie and Raymond Terrace. 4 Dungog Shire LGA is situated in the Lower Hunter Planning Region, and has an area of 2251 square kilometres and extends from alluvial flats and undulating country in the south to mountainous and rugged terrain in the north where the LGA is bordered by the Great Dividing Range via the Barrington Tops Ranges and Escarpment. The Shire is situated within the following co-ordinates: 32o 24 S, 151o 45 E. The traditional owners of the Dungog Shire area are the Gringai clan of the Wonnarua Nation. The shire offices in Dungog are located 214 kilometres from the Sydney CBD. Important statistics for Dungog LGA include: main employing industry sheep, beef cattle and grain farming other employing industries school education, dairy cattle farming, hospital and health care and road freight transport climate mean minimum temperature 10.5C mean maximum temperature 24C mean rainfall range 900mm 1500 mm major population centres Dungog, Clarence Town, Gresford (including East Gresford) and Paterson Description of Examination Process On 2 May 2016 the Acting Chief Executive of the Office of Local Government delegated to me (the Delegate) the functions of examining and reporting on the proposal to amalgamate the LGAs of Port Stephens and Dungog Shire. This is a proposal made by Port Stephens Council to the Minister for Local Government and referred to the Acting Chief Executive of the Office of Local Government. A copy of the Instrument of Delegation is shown in Appendix A. 4 Port Stephens Council Annual Report 2015, p.11 5 ABS Census Data, 2011, and Dungog Annual Report Council Boundary Review Port Stephens and Dungog Proposal 5

10 2 Introduction As the delegate I must examine and report on this proposal in line with the requirements of the Act. The factors for consideration under section 263(3) of the Act are: a) the financial advantages or disadvantages (including the economies or diseconomies of scale) of any relevant proposal to residents and ratepayers of the areas concerned b) the community of interest and geographic cohesion in the existing areas and in any proposed new area c) the existing historical and traditional values in the existing areas and the impact of change on them d) the attitude of the residents and ratepayers of the areas concerned e) the requirements of the area concerned in relation to elected representation for residents and ratepayers at the local level, the desirable and appropriate relationship between elected representatives and ratepayers and residents and such other matters as it considers relevant in relation to the past and future patterns of elected representation for that area e1)the impact of any relevant proposal on the ability of the councils of the areas concerned to provide adequate, equitable and appropriate services and facilities e2)the impact of any relevant proposal on the employment of staff by the councils of the areas concerned e3)the impact of any relevant proposal on rural communities in the areas concerned e4)in the case of a proposal for the amalgamation of two or more areas, the desirability (or otherwise) of dividing the resulting area or areas into wards e5)in the case of a proposal for the amalgamation of two or more areas, the need to ensure that the opinions of each of the diverse communities of the resulting area or areas are effectively represented and f) such other factors as it considers relevant to the provision of efficient and effective local government in the existing and proposed new areas As part of this process I have met with Port Stephens and Dungog Shire Councils 6, received written submissions and conducted a public inquiry. Details about the public inquiry sessions are shown in Table Met with Port Stephens and Dungog Shire on 7 and 8 June 2016 respectively and records kept of these two meetings. 6 Council Boundary Review Port Stephens and Dungog Proposal

11 2 Introduction Table 2.1 Public Inquiry Sessions Session Port Stephens Raymond Terrace Dungog Session Wests Nelson Bay Diggers Club 8 June :00pm-4pm Raymond Terrace RSL Club 8 June :00pm-10pm Dungog Memorial RSL Club 9 June :00pm-10pm Attendance Speakers Source: Transcripts of meetings will be available at OLG Council Boundary Review website Additionally, 174 written submissions were received. Copies of written submissions as well as the transcripts of each public inquiry session will be published on the Council Boundary Review website. Section 263(2B) of the Act requires that reasonable public notice of the public inquiry be given. In providing reasonable public notice, the following was undertaken: advertisements were placed in local and state media letters were written to each council within the proposal area and full access to the proposal, map and registration process was provided to all members of the public via the OLG Council Boundary Review website Rationale In its Merger Proposal, Port Stephens Council says there are considerable synergies between the communities and geography of Port Stephens Council area (West) and Dungog, being rural areas with dispersed settlement patterns; and generally both having tourism as an economic driver. 8 In the Proposal document, Port Stephens Council says that the merger will: increase the community benefit to areas that otherwise would experience increased costs and decreased service delivery potentially reduce the number of councils in a regional area without decreasing the ability for Hunter Councils to deal effectively with State agencies by limiting the impact on that body through decreased representation of communities in the region increase the scale and capacity of Dungog Shire Council through access to those areas of impact that were identified by IPART as being factors in Port Stephens Council having scale and capacity Port Stephens Council, Merger Proposal: Port Stephens Council & Dungog Shire Council, p.3 Council Boundary Review Port Stephens and Dungog Proposal 7

12 2 Introduction accede to the requests of some of the affected communities to become part of Port Stephens LGA 9 I have prepared this report on the Port Stephens and Dungog Shire merger proposal considering all the information I have received as part of the public consultation period as well as my own research relating to each factor I am required to consider under section 263(3) of the Act. The Final Report will be provided to the Minister and to the Boundaries Commission. The role of the Boundaries Commission is to review this report and provide its comments to the Minister. The Minister will make a decision on whether or not to recommend the implementation of this proposal to the Governor of NSW. 2.5 Summary of Submissions A total of 229 submissions have been received on this merger proposal. This was made up of 174 written submissions and 55 verbal submissions at the Public Inquiry sessions. Most submissions received were in support of this merger proposal (76% in support; 17% in opposition; 7% no position for or against). 10 This included overwhelming support from the Port Stephens community. There was also significant support from the Dungog Shire community for this proposal. This included a petition received from the Dungog community with 1,794 signatures. 11 Of the submissions that supported this proposal, there was an overwhelming rejection of the Port Stephens-Newcastle merger from the Port Stephens community and a strong rejection of the Dungog Shire-Maitland City Council merger from the Dungog community Councils Port Stephens Council Port Stephens Council s preferred position is to standalone, having been declared Fit by IPART. However, it states that its proposal meets the objectives of the NSW Government s Fit for the Future process and provides a sustainable financial future for both communities. 12 It also states that the communities most impacted by change also largely accept this proposal. 9 Ibid p submissions (76% support the merger proposal excluding the community petition in support). Further information on the submissions received is provided in Chapter Petition was received at the Public Inquiry Session at Dungog Memorial RSL Club on 8 June Port Stephens Council, Submission, pp.2 & 3 8 Council Boundary Review Port Stephens and Dungog Proposal

13 2 Introduction It considers this merger is a better outcome for: Dungog Shire and its communities than a Maitland merger and Port Stephens and its communities than a merger with Newcastle. Port Stephens argues that: the cost to merge is less than the alternative Minister s proposals the infrastructure backlog can be addressed without large increases in rates the impact on rates of this proposal is less than the alternative proposals services will be improved in Dungog and there is significant support for this proposal from the Port Stephens and Dungog communities. Dungog Shire Council Dungog Shire does not have a formal position on the merger proposal. However, Dungog Shire s preference is to standalone. Also, it says there are many who believe it should standalone but do not wish to express their view publicly. 13 It is noted that at its 21 June 2016 meeting, the Council voted against including in its submission the Dungog Shire Community Group s petition and the results of the Dungog Chronicle s poll of 13 May Community The community s strong support for this proposal is based on the common view that this is the best possible option for the Port Stephens and Dungog communities relative to the Minister s competing proposals for these communities which are currently on hold pending the completion of the examination process into this merger proposal. 15 This includes comments such as if we have to merge, this is the preferred outcome and this is the best option by a country mile. Critically, statements like these were from people who were saying if we have to merge, this is our preference. On the other hand, there were comments from residents who could see the economy and society benefits of an amalgamation compared with remaining separate eg. a logical and well aligned merger that would result in positive benefits for both of these existing council areas. Most submissions identified the strong communities of interest and geographical cohesion of the two existing council areas as reasons for supporting this 13 Dungog Shire Council, Submission, pp1 & Dungog Shire Council Minutes, 21 June submissions support the proposal. Council Boundary Review Port Stephens and Dungog Proposal 9

14 2 Introduction proposal. 16 The submissions also identify positive impacts on each of the factors for consideration including financial, communities of interest, service delivery, employment by council and rural impacts. This contrasts with the strong opposition to the alternative merger proposals being considered by the Government. It is clear from these submissions that the negative concerns raised under the factors for consideration under the alternative merger proposals are no longer a concern under this merger proposal. A number of submissions from the Dungog and Port Stephens community oppose this merger proposal. These submissions note their support for the alternate mergers that are under consideration. For example, some Dungog residents in opposition to this proposal favour the Dungog-Maitland merger. Similarly, some Port Stephens residents in opposition to this proposal support the Port Stephens-Newcastle merger. The reasons stated for opposing this merger largely focus on the lack of communities of interest or geographic cohesion between the council areas. A number of submissions have raised concerns about Dungog Shire Council s lack of community engagement and the fact it has no position on the merger proposal. As a result, community groups have made the effort to consult members of the community and presented a petition to Dungog Shire, requesting Dungog Shire consult more widely on the proposal with the community. It was stated that Dungog Shire has ignored the proposal and done absolutely nothing to inform or consult the residents. They consider that the council is not in a position to speak for the community. Councillors may express personal points of view, but they do not know what the community thinks. There were also strong concerns at the Government s merger process to date and in particular negative views expressed about the Delegates reports into the competing proposals for Port Stephens and Dungog. There was a general perception that in those reports the voice of a large proportion of submitters was ignored. 16 See Chapter 4, pp Council Boundary Review Port Stephens and Dungog Proposal

15 3 Finance 3 Finance This chapter contains an assessment of section 263(3)(a) of the Act. The financial advantages or disadvantages (including the economies or diseconomies of scale) of any relevant proposal to residents and ratepayers of the areas concerned. 3.1 Analysis In examining this factor, this review has considered the relative financial positions of each council, and the financial benefits or otherwise of the merger. This financial review is critical to the examination process as it outlines the financial burdens currently being experienced by the two councils' residents and ratepayers and the burden to be carried, should the amalgamation proceed. The Independent Pricing and Regulatory Tribunal (IPART) assessed Port Stephens to be Fit, for its scale and capacity, under the IPART Fit for the Future criteria. On the other hand, Dungog was found to be Not Fit and in its proposal to IPART to become Fit, Dungog proposed a Special Rates Variation (SRV) of 108.2% (92.2% above the rate cap) over six years to achieve the operating performance benchmark. 17 In 2012, the NSW Treasury Corporation (T Corp) undertook financial assessments of all NSW Councils and found that while Port Stephens Council s 10 year forecasts show a surplus position for each year (after excluding capital grants and contributions), Dungog had projected operating deficits in the first eight years of the 10 year forecast period. 18 More recent end of year Underlying Operating Results (after excluding capital grants and contributions) are as follows: Table 3.1 Underlying Operating Results Port Stephens & Dungog LGAs Port Stephens $1,613,000 $481,000 ($2,747,000) Dungog ($7,000) ($2,477,000) ($6,301,000) Source: Council Income Statements in General Purpose Financial Statements Annual Reports IPART, Assessment of Council Fit for the Future Proposals, pp in Port Stephens, Merger Proposal, op cit, p.2 18 NSW Treasury Corporation, Financial Assessment, Sustainability & Benchmarking Reports: Port Stephens & Dungog, Oct 2012, pp. 5 & 4 respectively. Council Boundary Review Port Stephens and Dungog Proposal 11

16 3 Finance Analysis by KPMG in shows the proposed merger has the potential to generate a net financial saving of $17 million to the new council over 20 years. Gross savings over 20 years will primarily be due to: streamlining senior management roles ($4.1 million) the redeployment of back office and administrative functions ($12.8 million), and efficiencies generated through increased purchasing power of materials and contracts ($5.5 million). In addition, the NSW Government has announced a funding package to support new councils that would result in $15 million being made available, should the proposed merger proceed. The implementation costs associated with the proposed merger (for example, information and communication technology, office relocation, workforce training, signage, and legal costs) are expected to be surpassed by the accumulated net savings generated by the merger within a four year payback period. Overall, the proposed merger is expected to enhance the financial sustainability of the new council through: net financial savings of $17 million to the new council over 20 years, achieving efficiencies across council operations through, for example, the redeployment of duplicated back office roles and administrative functions, and streamlining senior management, establishing a larger entity with revenue that is expected to reach $179 million per year by 2025, an asset base of approximately $708 million to be managed by the merged council; and greater capacity to effectively manage and reduce the $56 million infrastructure backlog across the region by maintaining and upgrading community assets. 20 Port Stephens Council engaged Consultants, Morrison Low, to undertake a high level merger business case to identify the benefits and costs of a potential merger with Dungog (see Appendix B for a copy of the report). Significantly, their forecast Operating Performance Ratio achieves the break-even benchmark in 2018 and remains above the benchmark for the remainder of the LTFP term See Appendix C for a copy of the report. 20 KPMG, Financial Analysis: Dungog Shire Council & Port Stephens Council, June 2016, pp Morrison Low, Merger Proposal Port Stephens Council and Dungog Shire Council (Port Stephens Council) p Council Boundary Review Port Stephens and Dungog Proposal

17 3 Finance Figure 3.1 Operating Performance Ratio Source: Morrison Low, Merger Business Case, Port Stephens Council and Dungog Shire Council, February 2016, p.10 The improvement in the Operating Performance Ratio reflects the impact of the transitional costs and in later years the impact of efficiencies generated from the merger, as well as the forecasted improved financial positions by both councils Economies of Scale The proposal will increase the rating base of the area by increasing the number of residences, businesses and farms subject to rates. See Table 3.2 below. Table 3.2 Scale of Rating Base 2014/15 Port Stephens No. of Residential assessments Residential rates revenue ($ 000) No. of Business assessments Business Rates Revenue ($ 000) No. of Farmland Rates assessments Farmland rates revenue ($ 000) 30,401 28,110 1,771 6, Dungog 3,444 2, ,064 Merged Council 33,845 30,755 2,137 7,294 1,475 2,879 Source: Council 2015 Annual Financial Statements and Information provided by Port Stephens Council Council Boundary Review Port Stephens and Dungog Proposal 13

18 3 Finance A larger rate base will provide the merged council with increased scale and capacity in considering important financial decisions. In this chapter and later in chapter 8, it will be noted how the efficiencies from greater scale will provide the merged council with the opportunity to invest in improved service levels, such as co-ordinated tourism marketing, and addressing Dungog s infrastructure backlog Rating Based on current rating, a merged council would have rates and annual charges revenue of $40.9 million. 22 The larger rate base can be expected to provide the new council with the opportunity to enter into negotiations for larger contracts and cost savings can be expected through the amalgamated council s increased purchasing power for say materials and contracts. For example, in its financial modelling for council mergers, KPMG has assumed a modest 2% efficiency saving for a regional council s expenditure on materials and contracts on 80% of items reported under materials and contracts (i.e. it assumes 20% would not be subject to scale efficiency). 23 However, there are significant differences from where the two Councils source their rates see Figure Council Income Statements in General Purpose Financial Statements, Annual Reports, KPMG, Outline of Financial Modelling Assumptions for Local Government Merger Proposals (KPMG 2016), p.2 14 Council Boundary Review Port Stephens and Dungog Proposal

19 3 Finance Figure 3.2 Rate Yield (Percentage) Comparison 2015/16 Source: Morrison Low, Merger Business Case, Port Stephens Council and Dungog Shire Council, February 2016, p.15 Also, there are significant differences in the breakdown of each council s average rates. Figure 3.3 Average Rates Comparison 2015/16 Source: Morrison Low, Merger Business Case, Port Stephens Council and Dungog Shire Council, February 2016, p.16 Council Boundary Review Port Stephens and Dungog Proposal 15

20 3 Finance It is noted that IPART is undertaking a review of the NSW Local Government rating system. The review process will include public consultation, with a final report due in December Also, the Minister has announced that existing rating structures for merged councils will be maintained for four years. 25 Following this IPART review and during the four year freeze, the new council will have the opportunity to consider and develop a suitable rating structure and as such the new council will be able to address the differences as per Figures 3.2 & 3.3. The Delegate notes that some questions have been raised about the KPMG modelling, however, both KPMG and Morrison Low show savings from the merger (albeit Morrison Low s savings are relative to the cost of other merger proposals). Nevertheless, there will be a challenge to the new council in harmonising the current rating structures, but with expert and technical assistance, this is not considered to be an insurmountable problem. With the IPART review and the support of the NSW Office of Local Government (OLG), it can be expected that an equitable, effective and efficient rating structure can be struck. 3.2 Submissions Port Stephens Council Port Stephens provides three positive financial impacts of the proposal on residents and ratepayers of this merger proposal: Port Stephens estimates that the infrastructure backlog under the proposal is $41.7m and the new council has the financial capacity to address this backlog without significant increases to council rates in the foreseeable future with regard to rates harmonisation, Port Stephens provides analysis to show that rates increases for Dungog ratepayers will be less under a merger with Port Stephens than a merger with Maitland the cost to merge is less than the alternative Dungog-Maitland and Port Stephens-Newcastle merger proposals. Dungog Shire Council Dungog Shire notes that the Morrison Low analysis undertaken on behalf of Port Stephens shows the merger will come at a cost to the communities. This compares with the estimated savings by KPMG of $17m over 20 years. 24 IPART,Review of the Local Government Rating System Local Government Issues Paper, April. 2016, pp. 1 & 4 25 ibid, p.1 16 Council Boundary Review Port Stephens and Dungog Proposal

21 3 Finance Dungog Shire states that if rates are harmonised, there will be significant increases for the Dungog community, but the merged entity would not have sufficient funds to address the infrastructure backlog. Dungog Shire does not support the 4 year moratorium on rates increases. Other Submissions A total of 94 submissions commented on the financial factor. Most submissions support this merger proposal and state that its impact on ratepayers and residents is more beneficial than either the Port Stephens-Newcastle or Dungog- Maitland merger proposals. The benefits of this proposal identified in submissions include: it is a more cost-effective and affordable option for Dungog and Port Stephens the impact on rates of this proposal for Dungog residents will be less than a Dungog-Maitland merger Dungog will impact less on the merger financially and is preferred for a stable and financially secure unified council moving forward the merged council will have a better financial position, and this will benefit residents of both council areas the merger can achieve scale economies. A small number of submissions oppose this merger proposal and identify three key potential negative effects of this merger proposal for residents and ratepayers. This includes: adding Dungog s large infrastructure backlog to Port Stephens will be a financial burden on Port Stephens Council. This is a burden that initially would need to be shouldered by the new council s residents and ratepayers. But, as can be seen from Figure 3.1, the merged council will be able to adequately address this initial financial encumbrance via its increasing annual operating surpluses Port Stephens faces significant financial risks from climate change associated with rising sea levels and extreme weather events, which could be a financial burden for Dungog Shire residents. However, it is noted that the Port Stephens Planning Strategy takes climate change effects into account Port Stephens Council s positive financial position faces significant risk due to outstanding court cases, which would result in a financial burden on Dungog residents. The Delegate believes that it is outside of the parameters of this examination report to consider the results of these cases. Some verbal submitters referred to the financial strength of Port Stephens Council and the benefits of this to Dungog. Others said that, from a financial perspective, Dungog cannot stand alone because of the problems with its road Council Boundary Review Port Stephens and Dungog Proposal 17

22 3 Finance infrastructure. One concern raised was the difference between the two councils business rates and the problem that this presents to the amalgamated council. 3.3 Conclusion Notwithstanding the differences in the savings calculated for the merger and also the two councils rating structures, the financial advantages to the new council outweigh the financial disadvantages. Also, the amalgamated council with its bigger rate base will provide the merged council with increased scale and capacity in considering important financial decisions. On this basis, the Delegate is of the view that the proposal warrants support, with respect to this factor. 18 Council Boundary Review Port Stephens and Dungog Proposal

23 4 Communities of Interest 4 Communities of Interest This chapter contains an assessment of section 263(3)(b) of the Act. The community of interest and geographic cohesion in the existing areas and in any proposed new area. 4.1 Analysis With respect to communities of interest, the Proposal states that the demographic profile of the two communities is very similar viz:- Figure 4.1 Age Profile Source: Port Stephens Council, Merger Proposal Port Stephens Council and Dungog Shire Council, 2016, p.7 The similarities in the zoning patterns of the two LGAs is depicted in Figure 4.2. Council Boundary Review Port Stephens and Dungog Proposal 19

24 4 Communities of Interest Figure 4.2 Zoning Patterns Source: Port Stephens, Merger Proposal Port Stephens Council and Dungog Shire Council, 2016, p.5 The Proposal also sets out the following with respect to communities of interest: Dungog Shire is almost entirely within the Port Stephens Police Local Area Command (LAC). This is critical for emergency management 20 Council Boundary Review Port Stephens and Dungog Proposal

25 4 Communities of Interest Dungog and Port Stephens sit on the Lower Hunter Bush Fire Management Committee and both Dungog & Port Stephens are within the Hunter New England Area Health District, Hunter Region educational services district, and residents of both LGAs have water and sewer provided by the Hunter Water Corporation. 26 With respect to geography, the Proposal sets out the following: geographic cohesion is demonstrated by the environment as the Dungog Shire comprises four river valleys: Williams, Allyn, Paterson and Lostock valleys which all form part of the Hunter Water Corporation catchment area as does Port Stephens. The rivers form natural boundaries 27 and both LGAs have significant natural environments with unique flora and fauna; also both have a depth of experience in the management of fragile environments Merger Proposal, op. cit, p.8 27 ibid, p.5 28 ibid, p.6 Council Boundary Review Port Stephens and Dungog Proposal 21

26 4 Communities of Interest Figure 4.3 Communities of Interest Environmentally Sensitive Area Source: Port Stephens Council, Merger Proposal Port Stephens Council and Dungog Shire Council, 2016, p.6 22 Council Boundary Review Port Stephens and Dungog Proposal

27 4 Communities of Interest 4.2 Submissions Port Stephens Council Port Stephens states that there are significant synergies between Port Stephens and Dungog Shire local government areas including geographic, environmental, social, economic, and operational. Key examples include: shared land use patterns of dispersed settlements amidst farm and environmental lands opportunity to unite water catchment of Lower Hunter region under one council similar age profiles and population density history of working together and working with other levels of government shared focus on tourism as major driver of economic activity and growth. Dungog Shire Council Dungog Shire provides data from the 2011 census that shows 2,064 local jobs of which 1,635 are filled by local residents. The census identifies 3,721 residents are employed, and 56% of these leave the Shire for work. i.e more residents work outside of the Shire than inside it. Dungog notes that the Port Stephens proposal focuses on the environment as evidence of geographic cohesion, however, it supports statements that suggest focussing on the environment neglects sociological and economic communities of interest. Dungog Shire discusses various elements of communities of interest including: transport there is no direct public transport link between Port Stephens and Dungog, people tend to travel more to Maitland than to Raymond Terrace health serviced by the Hunter New England Health Service as part of the Hunter cluster. Port Stephens is part of the Greater Newcastle cluster with respect to Tomaree Hospital emergency services policing is provided partly by Port Stephens Local Area Command and Central Hunter Command. Bushfire control is managed by the Lower Hunter District that includes Dungog and Port Stephens sports, recreation and culture mostly have cross-border rivalry related to the broader Hunter region. Other Submissions A total of 159 submissions commented on this factor. Most submissions in support of this merger proposal identify the strong communities of interest and geographic cohesion between the Dungog and Port Stephens communities. The Council Boundary Review Port Stephens and Dungog Proposal 23

28 4 Communities of Interest overwhelming view from submissions is that Dungog and Port Stephens are very similar communities in terms of demographics and landscape; they are made up of small rural villages and are very different to city areas such as Newcastle and Maitland. It has been described by many as merging like for like and a natural fit. The communities are considered to be culturally and economically aligned, sharing a strong interest in tourism. Many submissions identify that joining Dungog with Port Stephens will offer the opportunity to expand tourism with many positive benefits of joining a coastal area with a hinterland and leveraging off the established Destination Port Stephens brand. Many submissions provided examples of shared/common services across the region including: Port Stephens Police Local Area Command covers Dungog and Clarence Town Lower Hunter Bushfire Management Committee Risk Management Plan Hunter Water provides all town water and sewerage schemes for Dungog and Clarence Town Hunter New England Health District road safety, septic inspection, library programs and shared river catchment. It was noted that the merger would have the positive effect of bringing the water catchment under one local government area. With regard to Bushfire Management, it was raised that adopting an alternative merger proposal would negatively affect bushfire management, as it will mean that the new entity will have responsibility across Lower Hunter and Hunter Bush Fire Risk Management Plans which would be untenable. Some submissions also commented that council mergers would not affect where people shop so should not be a consideration under this factor. In contrast, a small number of submissions that oppose this merger argue that Dungog and Port Stephens have very limited or no communities of interest. Examples provided include: Port Stephens is tourism-orientated it is not rural like Dungog Port Stephens is development-focussed, which is different to Dungog s focus of maintaining rural amenity planning zones for Hunter and Central Coast Regional Environmental Strategy are different - Maitland and Dungog are in the central zone, with Port Stephens in the coastal zone that the 90km distance from Tomaree to Dungog is too large. 24 Council Boundary Review Port Stephens and Dungog Proposal

29 4 Communities of Interest It was also argued that Dungog has stronger communities of interest with Maitland eg train line, schools, tourism, shopping, arts, while Port Stephens has stronger communities of interest with Newcastle eg airport interest, shopping, and similar coastal areas. 4.3 Conclusion The community and geographic characteristics of these two LGAs are similar and strongly aligned. On this basis, the Delegate found that there is no impediment to the Proposal proceeding, with respect to this factor. Council Boundary Review Port Stephens and Dungog Proposal 25

30 5 Historical and Traditional Values 5 Historical and Traditional Values This chapter contains an assessment of section 263(3)(c) of the Act. The existing historical and traditional values in the existing areas and the impact of change on them. 5.1 Analysis The Proposal sets out the following: Both Dungog Shire and Port Stephens share a rich cultural heritage with local identity a key feature: this leads to a shared way of life and attitude to cultural and social cohesion; and respect for indigenous culture is embedded into both councils plans and strategies. Both areas provide for active and passive lifestyle choices for residents and visitors, as well as opportunities for community service and participation. Volunteers and community organisations are features of both areas Indigenous History The Port Stephens Council website sets out the Indigenous History of the LGA as follows: The Worimi are the traditional owners of the Port Stephens area. The area remains important for the Worimi people and traditional sites provide important information about their relationship and special connection with the lands. The Worimi nation, which envelops the Port Stephens local government area, extends from the Hunter River in the south to Forster in the north and as far west as the Barrington Tops and Maitland. The Worimi people spoke the Gathang language. The landscape includes an extraordinary number of Aboriginal cultural sites that predate the arrival of non-aboriginal people to the area. Port Stephens and the wider region is home to numerous sites of deep cultural significance, from the area now known as the Worimi Conservation Lands of the Stockton Bight to significant relic sites, including canoe trees at Little Beach. In the area stretching from Wallis Lake to Newcastle there are 37 recorded Ceremonial Sites (stone arrangements, bora grounds, carved trees and burial sites), 115 recorded campsites (mia mia, scarred tree, open campsite, shelter with deposit, well, fish trap, abraded grooves and quarries) and 97 middens. Four middens and a burial site are located at the base of Yacaaba Head. Middens are located at Fingal Spit, Anna Bay, Schnapper Point, Boat Harbour, Skate Bay and Fishermans Bay. There is a burial site at Skate Bay and grinding grooves at Morna Point Merger Proposal, loc. cit. 30 Port Stephens Council Website 26 Council Boundary Review Port Stephens and Dungog Proposal

31 5 Historical and Traditional Values The Visit Dungog website sets out the following under this heading: Dungog Shire was occupied by Koori people up to about 40,000 years before European settlement. The Kooris living in the area from what is now known as Brookfield at the headwaters of the Williams and Chichester Rivers belonged to a tribe known as the Gringai, a sub-group of the Wonnarua people. The areas known as Paterson and Gresford were home to another branch of the Gringai tribe, with whom the Kooris in the Dungog district intermarried and interacted. Northwards, the lower Williams was inhabited by the Kattang tribe of the Worimi people, with a tribal boundary with the Gringais at a point approximately at the present locality of Glen William and a territory which extended through what is now Clarence Town, down the Williams River to the Coast. Historians indicate that at the time of white settlement Koori people were present in relatively large numbers in the valleys of the Paterson and Williams Rivers. They were distributed over the district in local groups or urras approximately 8 miles apart, in villages which consisted of 8 or 9 huts or families. Each urra occupied a defined area of land. The coming of Europeans to the Shire had a devastating effect on the local aboriginal population. Apart from the conflicts which arose between Kooris and whites, European diseases significantly reduced the Koori population. In 1835 McKinley noted the sharp decline in the Koori birthrate, attributing it to factors arising from contact with Europeans. It is now accepted that by the 1830 s Koori society in the Shire had been irrevocably changed and damaged. From this time the population of Kooris in the Hunter as a whole fell steadily and the distribution of the population changed Colonial History The Port Stephens website described the colonial history of the LGA as follows: Port Stephens was discovered by Captain Cook in May 1770, and was named after Sir Phillip Stephens, Secretary of the Admiralty. The earliest Europeans to live in this area were five escaped convicts, wrecked at Port Stephens in They were befriended by the Worimi, with whom they lived for five years before being recaptured by Captain W.R. Broughton, of the HMAS Providence. Another early visitor was Governor Macquarie, who had thoughts of forming a settlement north of Newcastle and with that purpose in mind inspected Port Stephens from 31st December, 1811 to 2nd January, A small garrison of soldiers was established (at Soldiers Point) in about the late 1820s to try and prevent escaped convicts from Port Macquarie crossing the narrow section of Port Stephens en route to settled areas further south. Captain William Cromarty settled at Soldiers Point where he had been granted land in (the 1830s). (After his death in1838, his wife and children) stayed on at Soldiers Point, where they kept a small store for passing whalers and fishermen. 31 Visit Dungog Website history/indigenous history Council Boundary Review Port Stephens and Dungog Proposal 27

32 5 Historical and Traditional Values (The) Port Stephens Lighthouse (was) built in 1862, and a lighthouse-keepers residence, built about The Point was linked to the mainland by a permanent sand spit. In 1891 it was washed away in a gale and the spit has become an intermittent landform. 32 The Visit Dungog website sets out the following under this heading:- European settlement in all Planning Districts of the Dungog Shire was based on the movement of settlers further from the coast and the availability of land for agriculture. Continuing settlement resulted in the principal Shire towns being established along the Williams and Paterson Rivers in the early 1800 s. Land Acquisition and Appropriation Terms of land tenure in the early days were vague. The land was not surveyed when initially settled and settlers did not know their exact boundaries when official surveying took place. The Hunter Valley was closed to free settlement until 1825 because of its proximity to the penal colony at Newcastle. In 1823, the prisoners were transferred to Port Macquarie, and by 1825 exploration had shown that the Hunter Valley was not as accessible as first thought. The Williams Valley was opened up in 1825 by Governor Darling, with land granted according to settlers means, ability to carry out improvements and willingness to take assigned convicts. Free grants of land ranging from 329 and 2560 acres were made from 1823, or up to 9600 acres could be purchased outright. The first land portions in the Shire were surveyed on the basis of a line extending due north from Maitland. Early grantees were military or naval officers or free immigrants. Most grants were of flat and undulating land, with vegetation consisting of open forest and grassy woodland. Mountains and hills were generally reserved as Crown Land, and these areas were for the most part not populated until after 1861, when the NSW Land Act made it possible to select portions of between 40 and 320 acres. Prior to this Crown Land could be leased Volunteering The Port Stephens Council website states volunteers in Port Stephens are the lifeblood of our local area as they donate their time and energy to a range of activities that benefit our whole community. Many council programs and services could not be provided without the support of volunteers. 34 Similarly, Dungog Shire s Community Centre website says that our volunteers are important and together we accomplish great things. Volunteering gives so much to those in need, but more often than not gives so much more back Port Stephens Council website ( history 34 Port Stephens Council website ( 35 Dungog Shire Community Centre Website ( 28 Council Boundary Review Port Stephens and Dungog Proposal

33 5 Historical and Traditional Values Also, Local Living Dungog s website says there are lots of ways to volunteer and get involved with their organization eg volunteer with a growers stall at Saturday markets, help organize community events such as the Dungog Food Affair, awareness-raising at Dungog Show etc Submissions Port Stephens Council Port Stephens states that Dungog and Port Stephens share a rich cultural heritage with local identity being a key feature of both areas. Examples of shared history and traditional values include: aboriginal culture is highly valued and respected. Port Stephens is the land of the Worimi Nation and Dungog includes the family groups making up Gringai tribe, and more broadly the Wonnarua nation Dungog and Port Stephens are made up of a number of historical villages and towns settled in the 1830 s due to river trade and in 1843 there was a Raymond Terrace and Dungog District Council which operated until 1884 when Raymond Terrace Municipal Council was established. Port Stephens was established in 1895 and merged with Raymond Terrace Municipal Council in Dungog Shire Council Dungog Shire was occupied by indigenous sub-groups of the Wonnarua and Worimi peoples in the Dungog area, the Gringai tribe. There are four local aboriginal land councils in the Dungog council area. Dungog is still made up of traditional rural communities with agriculture contributing $93m annually to the local economy. This contrasts with Port Stephens which has witnessed significant population growth that has threatened traditional rural industries like oyster growing. Other Submissions Only a small number of submissions addressed this factor. Submissions in support of the merger proposal identify strong historical ties between Port Stephens and Dungog with regard to the common Aboriginal and European heritage of the areas. Worimi Nation occupied the lands which are known as Port Stephens. Worimi Aborigines traditionally lived in the coastal areas centred on Port Stephens, stretching from north bank of the Lower Hunter to the north end of Wallis Lake, 36 Local Living Dungog Website ( Council Boundary Review Port Stephens and Dungog Proposal 29

34 5 Historical and Traditional Values then inland to the Chichester area and down to Maitland. Dungog is included in this area. The people in the area south of the Hunter River are Wonnarua. It was noted that the Worimi and Wonnarau people should not be forced to compete for funding and merging Port Stephens and Dungog avoids the unintended consequences of having two major aboriginal land councils in one local government area. It was also stated that the Worimi Country extends to virtually all of Dungog, so it makes sense to better align the boundaries where possible. From white settlement, Port Stephens and Dungog have long been associated with each other. It was commented that their European history is identical with Raymond Terrace, Clarence Town and Paterson settled at the same time, while Dungog was settled a few years later. It was noted that Dungog was settled by many people who had origins in Port Stephens. Both areas relied on early river trade. The areas were settled due to Red Cedar Trees with historical ties going back a long way. Dungog was supported by the timber, dairying and beef industry, while historically Port Stephens had dairying, but now mainly beef cattle. From there was a joint council, Raymond Terrace and Dungog District Council. It was stated that we should go back to the future. It was suggested that the merger will not change the historical and traditional values of the areas concerned. Some submissions in opposition to this merger proposal suggest that Dungog s historical links are with Maitland, not Port Stephens. For example, the train line, musical and historical heritage are shared with Maitland. Dungog and Maitland share pride in architectural history of township, while Port Stephens is known for its focus on development. 5.3 Conclusion The review has noted that both Port Stephens and Dungog LGAs have similar traditional and cultural backgrounds. This factor is not considered to be an impediment to the merger proposal proceeding; in fact, the proposed merged council provides an opportunity to further develop these values. 30 Council Boundary Review Port Stephens and Dungog Proposal

35 6 Attitude of Residents and Ratepayers 6 Attitude of Residents and Ratepayers This chapter contains an assessment of section 263(3)(d) of the Act. The attitude of the residents and ratepayers of the areas concerned. 6.1 Analysis The examination has considered the attitudes expressed in verbal and written submissions in reaching the conclusion to support the merger proposal. 6.2 Submissions Port Stephens Council Port Stephens notes the community support for this proposal is evidenced by: 1,700 residents in Dungog signing a petition in support of the proposal Dungog Chronicle poll which found 77.5% nominating this proposal as its first preference 18,000 Port Stephens residents signed a petition objecting to the Port Stephens-Newcastle merger. Dungog Shire Council It is noted that the majority of the Port Stephens community do not have an opinion on the proposal given the low attendances at the public inquiry sessions. The attitudes of people differ, with Port Stephens campaigning for the proposal in the Dungog Shire community to gain support. Other Submissions The Port Stephens and Dungog Shire communities strongly support this merger proposal. 37 A petition with 1,794 signatures was also received from the Dungog community in support of this merger proposal. 38 Most submissions identified the strong communities of interest and geographical cohesion of the two existing council areas as reasons for supporting this proposal. The submissions also identify positive impacts on each of the factors for consideration including financial, communities of interest, service delivery, employment by council and rural impacts submissions support the proposal. 38 It is noted that some concerns were raised regarding people being coerced into signing the petition, or inaccurate information being used to obtain information. Council Boundary Review Port Stephens and Dungog Proposal 31

36 6 Attitude of Residents and Ratepayers This contrasts with the strong opposition to the alternative merger proposals being considered by the Government. It is clear from these submissions that the negative concerns raised under the factors for consideration for the alternative merger proposals are no concern for this merger proposal. Further, whilst there is always the option not to merge, the Delegate notes that Dungog has been deemed not fit for the future and in and 3.1.2, the scale benefits to the merged council of a larger rate base were discussed, relative to the two councils remaining separate. A number of submissions from the Dungog and Port Stephens community oppose this merger proposal. These submissions note their support for the alternate mergers that are under consideration. For example, Dungog residents in opposition to this proposal favour the Dungog-Maitland merger. Similarly, Port Stephens residents in opposition to this proposal support the Port Stephens- Newcastle merger. The key reasons for opposing this merger largely focus on the lack of communities of interest or geographic cohesion between the council areas. The Delegate received 174 submissions, with 76% in support of the Proposal, 17% in opposition while 7% indicated no opinion for or against the Proposal. In addition, a Petition with 1,794 signatures in support was also received. (It is noted that the responses received, albeit strongly in support represent a small percentage of the total population in the two council areas and opinions on the proposal can vary). The public s comments have also been referred to in each of the factors addressed in this report. 6.3 Conclusion The Delegate is of the view that this factor is not considered to be an impediment to the merger proposal proceeding. In fact, the Delegate believes that, from those interested in responding, there is strong support for the proposal. 32 Council Boundary Review Port Stephens and Dungog Proposal

37 7 Elected Representation 7 Elected Representation This chapter contains my assessment of section 263(3)(e) of the Act. The requirements of the area concerned in relation to elected representation for residents and ratepayers at the local level, the desirable and appropriate relationship between elected representatives and ratepayers and residents and such other matters as it considers relevant in relation to the past and future patterns of elected representation for that area. 7.1 Analysis The merger Proposal envisaged a popularly elected mayor and nine councillors with the new LGA divided into three wards. 39 Currently, Dungog has nine councillors with a council-elected mayor (annual basis) whereas Port Stephens has a popularly elected mayor and nine councillors. Table 7.1 Current Councillor Representation Council No of Elected members No of residents 2011 Representation per councillor Port Stephens 10 64,807 6,481 Dungog 9 8, Total 73,125 Source: Port Stephens & Dungog Shire Councils Annual Reports 2015 and ABS Census Data 2011 The Proposal of 10 Elected Members (EMs) would result in a residents per councillor ratio of 7313, reasonably close to the current ratio of 6481 for Port Stephens but significantly different for Dungog (from 924 to 7313). 40 A comparison with similarly sized NSW Regional City Councils revealed the following residents/councillor ratios (as at 2011 Census): 39 Port Stephens Council, Merger Proposal, op.cit., p Council Annual Reports and ABS Census Data 2011 Council Boundary Review Port Stephens and Dungog Proposal 33

38 7 Elected Representation Table 7.2 Current Councillor Representation Council No of Elected members No of residents 2011 Representation per councillor Shellharbour 7 63,605 9,086 Port Macquarie- Hastings 9 72,696 8,077 Coffs Harbour 9 68,413 7,601 Tamworth 9 56,292 6,254 Wagga Wagga 11 59,458 5,405 Albury 9 47,810 5,312 Source: Council Annual Reports 2015 and ABS Census Data 2011 Under Section 224 of the Act, a council must have between five and 15 councillors, one of whom must be the mayor. It is understood that the most common number of councillors across regional NSW is nine. However, it is considered appropriate to view elected representation as a matter of the public s access to the elected members, in addition to numerical comparisons. This is particularly important for rural and regional areas and in this regard accessibility to elected officials can be aided by the provision of sophisticated internet-based services and social media. If the Proposal proceeds, it would be important for the mayor, councillors and staff to develop a close working relationship as quickly as possible. This would need to be built around executive leadership supported by the elected body. To this end, it is considered that a mayor elected by and from among the elected members which, under proposed new legislation, would be for a period longer than one year, will facilitate this outcome. (It is noted that at a later time the community could decide by referendum to return to a popularly elected mayor, should that be its preference). As for the number of elected members, a recent OLG Explanatory Paper regarding proposed amendments to the Local Government Act proposes to amend Section 224 of the Act to have an odd number of Elected Officials, presumably to reduce the risk of the mayoralty (when elected directly by the members) being determined by lot and decisions being made on the casting vote of the mayor. 41 The Delegate supports the thrust of this amendment and would have recommended 11 members across four wards to keep the residents/councillor ratio close to the average for the listed NSW regional centres. But, as in Chapter 11 the Delegate is supporting the ward system and because Sections 280 and 281 of the Act require the same number of councillors to be elected for each ward, the Delegate is recommending 12 elected officials (based on four 3 member wards), with the mayor directly elected by the councillors. If 41 Local Government NSW, Feedback to the Office of Local Government on the Phase 1 review of the Local Government Act 1993, p Council Boundary Review Port Stephens and Dungog Proposal

39 7 Elected Representation this were to be adopted, it would yield a residents per councillor ratio of 6,094, about the same as Tamworth and significantly more than Wagga Wagga and Albury. Finally, to maintain quasi-representation in the more sparsely populated areas of the former Dungog Shire Council, it is suggested that, should the new council be established, consideration be given to the establishment of a citizens liaison committee that will have an advisory role to the new merged council. Also, it is suggested that 2-3 times per year council meetings be held in different villages of the new council so as to engage with those who may believe they have become disenfranchised (certainly disengaged) from the new council s policy-setting and decision-making. These were two initiatives that were successfully employed following the Victorian and South Australian council amalgamations of the 1990 s. 7.2 Submissions Port Stephens Council Port Stephens suggests the local government area be divided into three wards with approximately 19,370 electors in each ward. There should be a popularly elected mayor and nine councillors. Dungog Shire Council Under the proposal, elected representation for the Dungog community is likely to fall to one representative. Dungog Shire suggests that an additional ward be introduced, made up of the entire Dungog Shire area to assist with the transition. It is then up to the new entity to determine future representation and structure. Other Submissions A total of 51 submissions commented on this factor. Submissions in support of this merger consider this proposal protects representation, with the inclusion of wards. Many submissions in support of the merger proposal note that the reduction in representation is less of a concern in this proposal because the communities are both rural areas with similar issues and concerns. This compares with merging city councils, which would be dominated by city issues. Further, submissions from the Dungog community indicate acceptance and that in the past Dungog s representation was likely an over-representation and reduced representation is acceptable. It was suggested that with a reduction in representation, hopefully the quality of representation is increased. Council Boundary Review Port Stephens and Dungog Proposal 35

40 7 Elected Representation Regarding the number of elected representatives, Clarence Town Progress Association suggests that there should be between nine and 13 councillors. Four wards should be introduced, with each ward having two or three councillors. It also suggests having a popularly elected mayor. Another submission suggested three wards with three councillors and a popularly elected mayor. Another submission suggests 12 councillors with a popularly elected mayor. Submissions in opposition to the proposal are largely concerned about the impact of the reduction in representation for the Dungog community. Given the population differences, it was stated that Dungog would be outvoted by Port Stephens, with representation reducing to one or two councillors. 7.3 Conclusion Having regard to such factors as population, geographic span and diversity, elected member workloads and the requirements of the Act, it is recommended that should the merger Proposal proceed, the new council comprise of 12 councillors, including the mayor, who will be elected directly by the councillors. 36 Council Boundary Review Port Stephens and Dungog Proposal

41 8 Service Delivery 8 Service Delivery This chapter contains an assessment of section 263(3)(e1) of the Act. The impact of any relevant proposal on the ability of the councils of the areas concerned to provide adequate, equitable and appropriate services and facilities. 8.1 Analysis The Port Stephens proposal sets out the following: We have identified some areas that would be likely to provide definite improvements for the residents of Dungog Shire, in areas of services that residents of both LGAs value. For example, in the area of waste services: currently Dungog has a two bin service (red and yellow) the same as Port Stephens.Under this merger proposal, residents of Dungog Shire would have immediate access to all Port Stephens drop-off facilities where they currently have none; a service could also be supplied at Dungog at little cost. Dungog Shire residents would also benefit in terms of waste and recycle education programs which could be extended from Port Stephens Council s current service, again at little to no cost. There would be access to the waste strategic planning services of Port Stephens Council which currently are not available in Dungog Shire. 42 In the Port Stephens Council Proposal, it is stated that Dungog and Port Stephens have extensive rural road networks and both have experience dealing with high speed, low volume roads. Both councils have worked together on road maintenance and rehabilitation. Also, Port Stephens believes that there will potentially be a stronger alliance between coast and hinterland in tourism marketing with a merged council. 43 Significantly, the scale efficiencies and service cost savings generated by the merger present the opportunity for a new council to invest in new/better services and address Dungog s infrastructure issues, albeit the Infrastructure Backlog Ratio in the Proposal of 2.9% in 2024 still does not quite meet IPART s 2% annual benchmark due to the large backlog in Dungog. 44 Naturally, there will need to be a harmonisation of services between the two councils to achieve the service improvements anticipated from a merged council. However, this can be facilitated via a rolling program of service reviews which can be expected to ensure that the services provided to both communities are in a position to be improved rather than simply maintained (or even reduced). 42 Port Stephens Council, Merger Proposal, op cit, p11 43 ibid, p Morrison Low, Merger Business Case, op.cit., p10 Council Boundary Review Port Stephens and Dungog Proposal 37

42 8 Service Delivery Finally, Port Stephens is committed to customer service and conducts an annual customer satisfaction survey. In 2015, the community s overall satisfaction with Port Stephens Council was 79% (down from 87% in 2014). 45 Dungog does not undertake formal customer satisfaction surveys that today are a normal performance management tool. 46 (NB Every two years (with its rates notices), Dungog does ask questions about the community s needs). If the two councils merge, customer satisfaction surveys can be expected to be usual practice across the Dungog as well as Port Stephens areas of the new council. 8.2 Submissions Port Stephens Council Port Stephens considers this proposal will improve the overall provision of services to the current Dungog Shire area largely within existing resources without any disadvantages to the residents of Port Stephens. Key areas of service improvement to Dungog include: waste management, libraries and tourism. Dungog Shire Council Dungog Shire suggests that the Service NSW agency run by council should be continued to ensure equitable access to services. Dungog Shire notes some inaccuracies in the Port Stephens proposal document in relation to waste services currently provided to Dungog residents eg a waste drop-off service is available to Dungog residents. Dungog Shire states there will be a reduction in Financial Assistance Grants to the merged entity, and this will negatively impact on service delivery. Other Submissions A total of 63 submissions commented on this factor. Most submissions that commented on this factor state that due to Port Stephens Council s strong financial position and capacity, the merger proposal will result in improved services and facilities for the Dungog community. Some submitters said that there is general acceptance from the Dungog community that Dungog Shire lacks the capacity to improve its services and a merger with Port Stephens will have many positive benefits for this community. Examples provided of potential service improvements include: processing of development applications 45 Port Stephens Council, Annual Report, 2015, p Dungog Shire Council, General Manager advice. 38 Council Boundary Review Port Stephens and Dungog Proposal

43 8 Service Delivery waste services reduction in the infrastructure backlog eg roads and infrastructure regional Libraries Agreement and improved planning and development eg Rural Strategy document. Some submissions commented that services would be maintained in Port Stephens for this proposal. Submissions that are opposed to the merger proposal identify concerns with future service delivery of the merged council. A submitter states that Port Stephens does not adequately service its rural areas, so it was unlikely that Dungog would be adequately serviced, given it is more remote. Another submitter suggests that the differences between coastal and rural will be an issue for the merged council. It is stated that the merged council is unlikely to achieve the economies of scale due to the large geographical disposition of services. Another submitter considers that a Maitland-Dungog merger would have a better ability to meet service standards requirements for Dungog, given that it is a fast growing area. 8.3 Conclusion With every change process, there will always be a level of disruption to service delivery. But a rolling program of service reviews can be expected to deliver a range of services for the new council that are appropriate, effective and efficient. Also, the community synergies and geographic alignment of the two LGAs can be expected to facilitate scale efficiencies and the harmonising of services between the two current councils. On the basis of the above considerations, this factor is not considered to be an impediment to the merger proposal proceeding; in fact, based on the examples provided, one can expect service delivery to be improved. Council Boundary Review Port Stephens and Dungog Proposal 39

44 9 Employment 9 Employment This chapter contains an assessment of section 263(3)(e2) of the Act. The impact of any relevant proposal on the employment of staff by the councils of the areas concerned. 9.1 Analysis The following Table shows the total number of staff for each council in 2015: Table 9.1 Total Staff 2015 Council Total Staff (FTE) No. of Senior Staff Port Stephens Dungog 65 1 Source: Port Stephens Council Submission, Merger Proposal, Newcastle and Port Stephens, 2016, p.28 Morrison Low, Merger Business Case, op.cit., p.7 Submissions received from the councils and residents referred to the impact of potential reductions on council staff, see council submissions below for details. However, it needs to be noted that the Act contains protection for non-senior staff against redundancy for three years from the date of proclamation of a newly merged council. In this regard, Section 354F of the Act states: No forced redundancy of non-senior staff members for 3 years after transfer. If a staff transfer occurs, the employment of: (a) a transferred staff member and (b) in the case of a boundary alteration: i. a remaining staff member of the transferor Council and ii. an existing staff member of the transferee Council, other than a senior staff member, must not be terminated, without the staff member s agreement, within 3 years after the transfer day on the grounds of redundancy arising from the staff transfer. The issue of job reductions has arisen due to the inclusion of staff reductions in the gross savings over 20 years as modelled by KPMG: streamlining senior management roles ($4.1 million) the redeployment of back office and administrative functions ($12.8 million) KPMG, Financial Analysis: Dungog Shire Council and Port Stephens Council, June 2016, p.2 40 Council Boundary Review Port Stephens and Dungog Proposal

45 9 Employment Critically, the security of jobs in the reform process is addressed via the three year protection set out in Section 354F of the Act whilst the savings for the new council that arise from scale economies will be available to provide new and/or enhanced services for the community. On this basis, it should not be assumed that the newly merged council would lead to a reduction in overall staff numbers. This aligns with the outcome of a study by Jeff Tate Consulting wherein it was stated that as a result of the NSW council mergers in 2004, 487 additional positions were created between 2002/03 and 2010/11 which equated to employment growth of 11.7%. 48 Also, Section 218CA of the Act requires the number of regular staff in a small rural centre like Dungog (with a population of less than 5000) to be maintained (see chapter 10 for details). Finally, as stated in its Proposal, Port Stephens Council invests heavily in its staff s learning and development. On the other hand, Dungog Shire has one of the lowest per capita staff levels in the State, meaning that the operational demands for its staff leave little time for their professional development. The council merger can be expected to aid Dungog personnel in the important area of staff development Submissions Port Stephens Council The merger proposal will have positive outcomes for staff of both councils. It will secure the ongoing provision of services within Dungog Shire while maintaining presence in Raymond Terrace. Port Stephens also states it invests strongly in staff learning and development and Dungog would benefit from the same opportunities being available. The merger offers greater capability and capacity to perform key services. Dungog Shire Council Dungog Shire has had difficulty over many years recruiting skilled staff. Staff have had to take on a cross-section of roles. The merger offers the opportunity to divest some of these responsibilities to appropriately qualified staff. Dungog states that different cultures across the councils will be a difficult issue for the new merged council to address. 48 Jeff Tate Consulting, Report: Assessing processes and outcomes of the 2004 Local Government boundary changes NSW, (Independent Local Government Review Panel 2013), p Port Stephens Council, Merger Proposal, op. cit., p.13 Council Boundary Review Port Stephens and Dungog Proposal 41

46 9 Employment Other Submissions A total of 43 submissions commented on this factor. There is a general view amongst supporters of this proposal that local jobs will be protected under this proposal, relative to other proposals. It is also considered that the expansion of tourism and other services could actually increase job opportunities. Submissions against the merger proposal note that there will be job losses under any proposal. It was also stated that the concentration of staff in Raymond Terrace would be detrimental to Dungog. 9.3 Conclusion This review has established that a merger will not necessarily lead to a reduction in overall staff numbers. In fact, the 2004 NSW merger process resulted in employment growth of 11.7% over eight years as the larger councils embraced the provision of new and/or enhanced services that the benefits of scale and capacity provide. 50 Also, notwithstanding the loss of corporate knowledge through the potential loss of at least one senior staff position, the new publicly advertised positions created can be expected to attract very strong fields of candidates that will more than offset the loss of staff with extensive local knowledge. Having regard for these considerations, the Delegate considers that there is no impediment to the Proposal proceeding, with respect to this factor. 50 Jeff Tate, loc. cit. 42 Council Boundary Review Port Stephens and Dungog Proposal

47 10 Rural Factor 10 Rural Factor This chapter contains an assessment of section 263(3)(e3) of the Act. The impact of any relevant proposal on rural communities in the areas concerned Analysis On page 12 of its Merger Proposal, Port Stephens Council states:- The Williams River Valley is a continuum with the western part of Port Stephens LGA and there would be no impact on the rural communities, other than access to any additional services currently enjoyed across the border.. Aside from the five villages/towns (Dungog, Clarence Town, Gresford, Vacy and Paterson), the Dungog Shire is relatively sparsely populated. In these areas the impacts have yet to be fully understood but would be the subject of further study should this option advance. As per Figure 4.2, both Port Stephens and Dungog LGAs have a large proportion of their areas which are zoned Rural. Also, the head office of Dungog Shire Council is located in the township of Dungog, a rural centre with a population of Significantly, Section 218CA of the Act provides that the new council must ensure that the number of regular staff of the council employed at the rural centre is, as far is reasonably practicable, maintained at not less than the same level of regular staff as were employed by the previous council at the centre immediately before the amalgamation.took effect. Notwithstanding that under Section 218CA the number of regular staff in Dungog is in practical terms to be maintained, service delivery to isolated areas can be addressed via a range of modern state of the art tools eg. internet-based delivery, service hubs, transaction centres. Also, a council/contractor vehicular service delivery could be implemented Submissions Port Stephens Council Both council areas have a dispersed settlement pattern with a number of rural villages and towns. Port Stephens recognises the need to preserve these characteristics as vital for the ongoing wellbeing of those communities ?opendocument&navpos=220 Council Boundary Review Port Stephens and Dungog Proposal 43

48 10 Rural Factor Dungog Shire Council Dungog Shire states that the retention of the administrative centre in Dungog is paramount for the delivery of services to the surrounding areas. It is also stated that protection of employment within the Dungog Township will be crucial in the long-term recovery of the township as a consequence of the natural disaster in April There is also a need to continue the local health forum for rural health needs, as Gresford community is still lacking in GP services. Other Submissions A total of 32 submissions commented on this factor. Most submissions in support of this merger commented that the improvement of services under this proposal would have positive effects on the Dungog community. Others suggested that the similarities of the two rural communities means that rural issues are likely to be heard and adequately addressed, relative to the alternate proposals which merge a rural council with a city council. It was also noted that rural issues would be represented through wards. It was noted that Dungog Shire s rural strategy is inadequate and considered an urban expansion document rather than a rural strategy, while Port Stephens has a more developed rural strategy which would be of benefit to Dungog. A small number of submissions against the proposal addressed this factor. It was stated that Port Stephens is pro-development, which does not align with the rural character of Dungog. It was also suggested that rates increases in Dungog would negatively affect local businesses, resulting in job losses, reduction in services such as police and eventual population decline Conclusion Having regard to the above considerations, the Delegate found no impediment to the Proposal proceeding, with regard to this factor; in fact if established, the new council should carefully consider the various options outlined in this chapter (and earlier in Chapter 7) that could be employed to improve service delivery to the isolated rural areas. 44 Council Boundary Review Port Stephens and Dungog Proposal

49 11 Wards 11 Wards This chapter contains an assessment of section 263(3)(e4) of the Act. In the case of a proposal for the amalgamation of two or more areas, the desirability (or otherwise) of dividing the resulting area or areas into wards Analysis In page 13 of its Proposal, Port Stephens states: Under this option, Port Stephens Council would seek to maintain the current three (3) ward structure to ensure adequate representation across the whole local government area However, Port Stephens Council is open to reviewing the ward structure once the views of all stakeholders are canvassed. Figure 11.1 Existing Port Stephens Wards and Dungog Shire Council Area Source: Proposal for new Dungog-Port Stephens Regional Council, Submission of Port Stephens Council, p.34 At the September 2012 NSW Local Government elections, a popularly-elected mayor and nine councillors across three wards were elected to Port Stephens Council while nine councillors across three wards were elected to Dungog Shire Council (with the mayor elected by the councillors). The ward structures for the two councils are as follows: Council Boundary Review Port Stephens and Dungog Proposal 45

50 11 Wards Table 11.1 Wards Council Port Stephens Dungog Wards East Ward Central Ward West Ward A Ward B Ward C Ward Source: Port Stephens Council Annual Report, 2015, p.20 and Dungog Shire Council Annual Report, 2015, p.8 The various merits of a ward system as opposed to no wards are often debated across the Local Government sector. In reality, the circumstances of each Local Government area are different and a decision to have wards or not must be assessed against the specific current and future circumstances of the area concerned. In this case, it is considered that in a newly merged council representation should be maximised in the first instance and as such guarantee representation across the new council. Obviously, this cannot be guaranteed under an undivided system and on this basis a ward system is recommended. Also, given that both councils are currently warded, there is merit in continuing with wards, at least in the first instance. As for the number of wards, given a council comprising 12 councillors (including a mayor directly elected from within ) and the legislative requirement for the same number of councillors to be elected for each ward, it is proposed that the new LGA be divided into four 3 member wards. To help ensure suitable representation levels and to marry in both councils rural and semi-rural areas, it is considered that when drawing ward boundaries, it may be advantageous for two wards to encompass territory in both of the existing LGAs Submissions Port Stephens Council Port Stephens proposes a three ward structure to enable adequate representation across the whole local government area. This could allow Dungog residents to return at least two councillors on the merged council. Dungog Shire Council Dungog Shire suggests that an additional ward within a merged council for the Dungog area comprised of three councillors in the first term is required to ease the transition. This will ensure the values of the Dungog communities are preserved. 46 Council Boundary Review Port Stephens and Dungog Proposal

51 11 Wards Other Submissions A small number of submissions commented on this factor with overwhelming support for the introduction of wards to ensure that Dungog and its rural interests are represented on a new council. Suggestions include: A submitter suggests wards should be introduced whereby the west ward of Port Stephens includes all of Dungog and the boundaries of the Central/West ward shifted to accommodate even numbers Another submission support wards suggesting four wards, including an additional ward for the Dungog area Another submitter suggests three wards with three councillors and a popularly elected mayor Another submitter suggests four wards with three councillors per ward or three wards with three councillors. The north ward should include Seaham, Hinton, Brandy Hill and Butterwick Conclusion Recognising concerns regarding the level of representation in Dungog, this review considers that a multi-councillor ward system will deliver the best system to provide representation across the new council. If the Proposal proceeds, it is recommended that the new merged council be divided into four 3 member wards. Finally, having regard to the desirability (or otherwise) of dividing the new LGA into wards, the Delegate found that there is no impediment to the Proposal proceeding, with respect to this factor. Council Boundary Review Port Stephens and Dungog Proposal 47

52 12 Diversity 12 Diversity This chapter contains an assessment of section 263(3)(e5) of the Act. In the case of a proposal for the amalgamation of two or more areas, the need to ensure that the opinions of each of the diverse communities of the resulting area or areas are effectively represented Analysis Port Stephens and Dungog have very significant similarities in their demographic characteristics and socio-economic profiles. For example, 2011 Census data shows that Aboriginal and Torres Strait Islander (ATSI) people make up 3.6% of the Port Stephens population and 3.2% for Dungog. Also, the Male/Female Ratio for both LGAs is almost 50/50; further, both communities have relatively similar levels of advantage and disadvantage as measured by the Socio-Economic Index for Areas (SEIFA). 52 In Chapter 4 of this report, Figure 4.1 showed the very strong alignment in the Age Profiles of Port Stephens and Dungog. Other similarities are depicted in Table Council Boundary Review Port Stephens and Dungog Proposal

53 12 Diversity Table 12.1 Selected Socio-Economic Data for Port Stephens and Dungog LGAs Port Cultural Diversity -Ancestry Australian English Irish Scottish German Stephens 33.3% 32.5% 8.0% 7.5% 3.1% Dungog 35.4% 33.5% 8.8% 7.6% 4.0% Religious Affiliation Anglican Catholic No Religion Uniting Church Pres.& Reformed 29.4% 23.3% 18.7% 6.4% 3.9% 35.0% 20.0% 16.8% 6.6% 6.6% Median Weekly Personal Income $498 $484 % of Aust Median Income Median Weekly Family Income 86.3% $ % $1278 Median Weekly Income % of Aust Median Income Median Weekly Household Income 84.1% $ % $1005 % of Aust Median Income 81.0% 81.4% Age Profile <15 years years >64 years Median Age Years (Aust. Av) 19.3% 61.7% 19.0% 42 (37) 18.8% 63.5% 17.7% 44 (37) Source: Port Stephens: Dungog: Not surprisingly, given the relatively older populations in Port Stephens and Dungog, the councils have ensured that the provision of such aged services as in-home care (transferred to Integrated Living Australia in ), facilities for senior citizens and volunteer programs (incl. training for volunteers) are strategically represented in their areas. Port Stephens Council s commitment to its ageing population is vindicated by its employment of experienced staff in this and related community services areas. Dungog s resources are much less, even in relative terms. If the proposal is 53 Port Stephens Council, Annual Report, 2015, p.50 Council Boundary Review Port Stephens and Dungog Proposal 49

54 12 Diversity adopted, the new council will need to apply social cohesion and community opinion techniques to those service areas where demands are high and delivery has been under-represented. Similarly, the new council needs to ensure that service provision to its disparate villages and townships is also not under-represented. The new council must ensure that there is appropriate engagement with its smaller towns, villages and rural areas during its Community Strategic Plan process to make certain that the opinions of these diverse communities are effectively represented. Finally, elected representation and initiatives to maintain quasi-representation in the more sparsely populated areas were covered in Chapter Submissions Dungog Shire Council Dungog refers to data from the 2011 census which shows that 5.4% of the population was born overseas, from Anglo/European backgrounds and the Aboriginal and Torres Strait Islander population is above average. Dungog Shire engages with the four land councils on matters that arise locally. Other Submissions A small number of submissions addressed this factor. The submissions suggested that due to the council areas being similar and rural in nature, rural communities are likely to be heard and their issues addressed in the merged council where wards are introduced. A submission referred to the percentage of Dungog s total population who were born overseas or are from Anglo/European or Aboriginal and Torres Strait Islander backgrounds. It notes Dungog Shire engages with the four land councils on matters that arise locally Conclusion It is clear from the statistical information and the submissions received that Port Stephens Council and Dungog Shire Council have very similar demographics. Should the Proposal proceed, this can be expected to assist in implementing the merger, albeit that the opinions of the area s diverse communities will need to be gathered in determining the merged council s services. Also, the opinions of the area s diverse communities will need to be collected in the preparation of the new Council s Community Strategic Plan, should the new council be established. On the basis of the above information, the Delegate found that there is no impediment to the Proposal proceeding, with respect to this factor. 50 Council Boundary Review Port Stephens and Dungog Proposal

55 13 Other Factors 13 Other Factors This chapter contains an assessment of section 263(3)(f) of the Act. Such other factors as it considers relevant to the provision of efficient and effective local government in the existing and proposed new areas Name of Council A number of submissions provide their support for naming the new council Dungog-Port Stephens Regional Council. The submissions note the importance of maintaining Dungog and Port Stephens in the name, some say for the benefits of tourism. Previously, Port Stephens Council had suggested this name when submitting their Proposal at the Public Inquiry Meeting of 8 June In Chapter 4, it was noted that some comments had been made about the potential to extend the tourism marketing of Destination Port Stephens to the Dungog LGA. (There is the opportunity to promote the new council area as Sand Dunes to the Snow or Beaches to the Barringtons ). Given that the merger provides the two areas, as a joint body, with these tourism marketing possibilities, it is recommended that if the proposed new council is to be implemented, it be named Dungog-Port Stephens Regional Council Other Merger Proposals It is noted that previously Delegates Reports had been prepared for the following merger Proposals: Newcastle City and Port Stephens Councils, Maitland City and Dungog Shire Councils. It is outside of the scope of this examination report to comment on these two other proposals Election of Mayor In Chapter 7, it was highlighted that in a new council, it is important for the mayor, councillors and staff to develop a close working relationship as swiftly as possible and on this basis, it is recommended that if the new council is established, the mayor be directly elected by the councillors. Council Boundary Review Port Stephens and Dungog Proposal 51

56 13 Other Factors 13.4 Conclusion Having regard to the above issues, the Delegate considers that there is no impediment to the Proposal proceeding, with respect to this factor. 52 Council Boundary Review Port Stephens and Dungog Proposal

57 14 Recommendation 14 Recommendation 14.1 Key Findings There are differences in the two councils rating structures that will require appropriate harmonising. However, the financial advantages of the merger outweigh the financial disadvantages. Also, the larger council with its bigger rate base will provide the merged council with increased scale and capacity in considering important financial decisions. The Proposal warrants support, with respect to the financial factor. (Refer Chapter 3) The community and geographic characteristics of the two LGAs are similar and strongly aligned. (Refer Chapter 4) Port Stephens and Dungog LGAs have similar traditional and cultural backgrounds. It is considered that the proposed new council provides an opportunity to further develop these values. (Refer Chapter 5) Given the verbal and written feedback from the councils and the public, on balance, there is strong support for the proposal. (Refer Chapter 6) The Delegate believes that, should the merger Proposal proceed, it is important for the mayor, councillors and staff to develop a close working relationship as quickly as possible. To this end, it is considered that a mayor elected by and from among the elected members will facilitate this outcome. Also, having regard to the number of residents/councillor ratios for six other similarly sized NSW Regional City Councils, a council with 12 elected officials seems appropriate. (Refer Chapter 7) Should the new council be established, to maintain quasi-representation in the more sparsely populated areas of the former Dungog Shire Council, consideration should be given to the formation of a citizens liaison committee that will have an advisory role to the new council. Also, it is suggested that 2-3 times per year council meetings be held in different villages of the new council to engage with these isolated communities. (Refer Chapter 7) With every change process, there will always be a level of disruption to service delivery, however, a rolling program of service reviews can be expected to deliver a range of services for the new council which are appropriate, effective and efficient. (Refer Chapter 8) A merger will not necessarily lead to a reduction in overall staff numbers, with examples showing that new bigger councils from past amalgamations have embraced the provision of new and/or enhanced services requiring the creation of additional positions. Also, the new publicly advertised positions created through the merger process can be expected to attract very strong fields of candidates. (Refer Chapter 9) Council Boundary Review Port Stephens and Dungog Proposal 53

58 14 Recommendation The Local Government Act provides employment protection to council staff employed by a newly merged and also for those working in a rural centre such as Dungog. (Refer Chapter 9) Both Port Stephens and Dungog LGAs have a large proportion of their areas zoned Rural. Also, under Section 218CA of the Act, Dungog township is deemed a rural centre and as such a new council after amalgamation must maintain as far as is reasonably practicable the same level of regular staff in Dungog as were employed prior to the merger. Given the relatively large rural areas of the two councils, it is suggested that the new council, if proclaimed, should endeavour to improve service delivery to isolated areas via a range of modern state of the art tools. (Refer Chapter 10) The merits of a ward system as opposed to no wards are often debated across the Local Government sector. In this case, it is considered that in a newly merged council representation should be maximised in the first instance and as such guarantee representation across the new council. Obviously, this cannot be guaranteed under an undivided system. As for the number of wards, given a council comprising 12 councillors and also the legislative requirement for the same number of councillors to be elected for each ward, a new LGA divided into four 3 member wards seems appropriate (Refer Chapter 11) It is clear from the statistical information and the submissions received that the two councils have very similar demographics. This can be expected to assist in implementing the merger, albeit the opinions of the area s diverse communities will need to be collected in determining the services to be provided. A similar community opinion process will need to be followed in the preparation of the Community Strategic Plan. (Refer Chapter 12) 14.2 Major Findings and Recommendation This review presents the following major findings in support of its recommendation to the Minister for Local Government: that a merger between the local government areas of Port Stephens and Dungog will derive financial savings for the two councils while the larger rate base can be expected to provide the merged council with increased scale and capacity to consider important financial decisions eg negotiating larger contracts, providing new/better services, addressing infrastructure backlogs, etc. there is a very strong alignment between the two council s community and geographic characteristics and traditional and cultural backgrounds and residents and ratepayers can expect these values to be further developed through the increased scale and capacity of a merged council, and there is strong support from those who lodged a submission. 54 Council Boundary Review Port Stephens and Dungog Proposal

59 14 Recommendation 14.3 Recommendation to Minister That the proposed merger of Port Stephens and Dungog Shire Councils proceed, subject to consideration by the Boundaries Commission and approval by the Minister for Local Government Other Matters for Attention and Consideration Should the merger proposal proceed, this review provides the following matters for attention and consideration by the Minister, Boundaries Commission and the new council: that if the Proposal proceeds, the new LGA comprise of 12 councillors, including the mayor, who will be directly elected by the councillors that if the Proposal proceeds, the new LGA be divided into four 3 member wards, and that if the Proposal proceeds, the new LGA be named Dungog-Port Stephens Regional Council. Council Boundary Review Port Stephens and Dungog Proposal 55

60 56 Council Boundary Review Port Stephens and Dungog Proposal 14 Recommendation

61 Appendices Appendices A. Instrument of Delegation Council Boundary Review Port Stephens and Dungog Proposal 57

62 58 Council Boundary Review Port Stephens and Dungog Proposal

63 Appendices B. Port Stephens Merger Proposal Council Boundary Review Port Stephens and Dungog Proposal 59

64 Merger Proposal Port Stephens Council and Dungog Shire Council PSC Submission 1

65 Merger Proposal Port Stephens Council and Dungog Shire Council Port Stephens Council s preferred position is to stand alone, having been declared fit by the Independent Pricing and Regulatory Tribunal (IPART). Port Stephens Council was deemed to meet all financial criteria and to have scale and capacity. The merger with Newcastle City Council (NCC) proposed by the Minister for Local Government is a flawed alternative that is strongly opposed by the community of Port Stephens. Council has received some 15,000 petition signatures from residents opposed to the merger. Council s online poll, which attracted more than 2,100 respondents demonstrated 93.4% opposition to the merger proposal. Port Stephens Council has considered the objectives of the Fit for the Future process, which may be briefly summarised as: to increase the financial sustainability of councils; and in some areas to reduce the number of councils to achieve planning and service delivery goals between State and local government agencies. In this context, the objectives are not met in any proposed merger with NCC. However, Council has considered the position of the State government and the Premier s goals in the process to research and develop an alternative option to the Minister s merger proposal. In summary the alternative proposal of a merger between Port Stephens Council and Dungog Shire Council will: increase the community benefit to areas that otherwise would experience increased costs and decreased service delivery; potentially reduce the number of councils in a regional area without decreasing the ability for Hunter Councils to deal effectively with State agencies by limiting the impact on that body through decreased representation of communities in the region; increase the scale and capacity of Dungog Shire Council through access to those areas of impact that were identified by IPART as being factors in Port Stephens Council having scale and capacity ; accede to the requests of some of the affected communities to become part of Port Stephens Local Government Area. The option below is discussed giving consideration to the requirements of Section 263(3) of the Local Government Act 1993 as required by Section 218F(2). 2 PSC Submission

66 Option Amalgamation of Port Stephens Council with Dungog Shire Council The Independent Local Government Review Panel (ILGRP) recommended that Dungog Shire Council be merged with Maitland City Council however the State government rejected this in favour of a merger of Dungog Shire with Gloucester Shire Council. Both Dungog Shire and Gloucester Shire were declared by IPART to be unfit for the future. It is therefore reasonable that Dungog Shire Council looks to an amalgamation which would provide more benefit, and the option of merging with Port Stephens Council is being canvassed. Dungog Shire Council is on the public record as desiring to remain a stand-alone LGA. Gloucester Shire Council has subsequently requested the Minister to refer to the Boundaries Commission a proposed amalgamation of itself with Great Lakes Council and Greater Taree Council. In the light of this, Minister Toole has revisited the initial recommendation of the ILGRP and referred the Maitland City/Dungog Shire Councils option to the Boundaries Commission as a consequential merger proposal. Summary The option of a Port Stephens Council/Dungog Shire Council merger has not been formerly canvassed with the communities of either Dungog or Port Stephens LGAs. However the proposal for a merger between Dungog and Maitland has been canvassed as part of the Fit for the Future process: both Councils rejected the proposal. There is little community of interest between the growing Maitland city and the rural, sparsely settled Dungog LGA. On the other hand there are considerable synergies between the communities and geography of Port Stephens Council area (west) and Dungog, being rural areas with dispersed settlement patterns; and generally both having tourism as an economic driver. Boundaries Commission Criteria (Section 263 of the Local Government Act 1993) (a) Financial the financial advantages or disadvantages (including the economies or diseconomies of scale) of any relevant proposal to the residents and ratepayers of the areas concerned IPART has found Dungog Shire to be unfit. In their proposal to IPART, to become fit involved considerable rate increases. In particular, Dungog did not meet the sustainability criterion. The council has proposed a significant SVR of 108.2% (92.2% above the rate peg) over six years to achieve the operating performance benchmark which may not be reasonable. 1 The Premier s announcement on 18 December 2015 was a merger proposal between Dungog and Gloucester Shire councils, the latter of which was also found to be unfit. 2 The proposal from Gloucester Shire was also to envisage increased rates. 3 1 IPART Assessment of Council Fit for the Future Proposals pp ibid p.68 3 ibid PSC Submission 3

67 Residents of Dungog and Gloucester Shire Councils would be involved in the proposed merger of two unfit councils, with increased costs and decreased service levels for many years to come. On the other hand Port Stephens Council has no intention or need to apply for rate increases above the rate peg for the foreseeable future so for the residents of Dungog Shire there would be an overall more positive outcome than a Gloucester/Dungog Shire Council or Maitland City/Dungog Shire Council proposed merger afford. 4 As a full amalgamation there would be access to funds from State government which would ameliorate the impact on the Port Stephens Council financial performance; and funds to address infrastructure issues within Dungog Shire Council. Residents would benefit from a moratorium of rates increases of four years. Thereafter there would be a harmonisation of rates, the impact of which is likely to be significantly less for residents and businesses in Port Stephens than a merger with NCC; and considerably less than the envisaged 108% increase over six years that Dungog residents would experience if their Council s preferred option to stand alone is realised. Independent consultants Morrison Low were asked by Port Stephens Council to develop a business case for this option which is attachment 1. The table below demonstrates the net present value (NPV) costs of the merger proposals currently in view across the nine (9) years of the respective Long Term Financial Plans to PSC/Dungog Cost Dungog & Maitland Cost PSC/Newcastle Cost Future Value $2.4 million $4.7 million $7.4 million Port Stephens Council would bring to the merger strong financial options that would mean that these costs are achievable over the longer term with less impact on both communities than any other merger proposals for both communities currently under consideration. (b) Community of interest and Geographic Cohesion the community of interest and geographic cohesion in the existing areas and in any proposed new area Dungog Shire Council has a land use pattern of dispersed settlements amidst farmland and at its upper reaches, eco-tourism through access to the wilderness area of the Barrington Tops. The upper reaches of its main valleys are sparsely settled, reflecting the rural nature of the economy of that area. 4 Port Stephens Council Long Term Financial Plan p.40 4 PSC Submission

68 Geographic cohesion is demonstrated by the environment as the Dungog Shire comprises four (4) river valleys: the Williams, Allyn, Paterson and Lostock valleys, which all form part of the Hunter Water Corporation catchment area as does Port Stephens. The rivers form natural boundaries that are in contrast to the geo-political boundaries drawn in previous centuries. The zoning patterns of the two LGAs match as shown in the figures below. PSC Submission 5

69 6 PSC Submission Both shires have significant natural environments with unique flora and fauna. Both Councils have a depth of experience in the management of fragile environments.

70 The population of the Dungog LGA generally tends to gravitate towards Raymond Terrace (Williams River valley) and Maitland (Lostock, Paterson and Allyn River valleys); all tend to recreate to the east in Port Stephens LGA s Tomaree and Tilligerry Peninsulas. The demographic profile of the two communities is very similar as the graph below demonstrates. PSC Submission 7

71 In terms of community access to services, Dungog Shire is almost entirely within the Port Stephens Police Local Area Command (LAC). This is critical for emergency management: Port Stephens and Dungog Shire, together with Maitland City and Cessnock Council and other government agencies form the Lower Hunter Emergency Management Committee with the Police. Port Stephens Council is the funding agency on behalf of the four councils, receiving and disbursing funds from State agencies. The Rural Fire Service Lower Hunter Zone also incorporates those Councils and does not include NCC which also comes under a different Police LAC. In the event of emergencies the LAC Commander becomes the leader of the combat agencies: this would be difficult in the event of two LACs for a merged entity involving NCC. Port Stephens and Dungog Shire Councils sit on the Lower Hunter Bush Fire Management Committee (NCC does not). Both Port Stephens and Dungog are within the Hunter New England Area Health District; the Hunter Region educational services district; and residents of both LGAs have water and sewer provided by Hunter Water Corporation. (c) Historic and Traditional Values the existing historical and traditional values in the existing areas and the impact of change on them Both Dungog Shire and Port Stephens share a rich cultural heritage with local identity a key feature: this leads to a shared way of life and attitude to cultural and social cohesion; and respect for indigenous culture is embedded into both Councils plans and strategies. Both areas provide for active and passive lifestyle choices for residents and visitors, as well as opportunities for community service and participation. Volunteers and community organisations are features of both areas. Aboriginal cultural heritage is valued: Port Stephens is the land of the Worimi nation and Dungog adjoins this land, as part of the Gringai tribe s lands. Both areas have many sites and areas of significance to Aboriginal people, including shell middens, scarred trees, occupation and ceremonial sites and places of spiritual value. Non-Aboriginal cultural heritage in Port Stephens includes historic villages, heritage conservation areas at Raymond Terrace, Tipperary Hill and Hinton, rural landscapes, significant early residences such as Tomago House and Tanilba House, lighthouses, churches, cemeteries, war memorials, courthouses, schools, shipwrecks, archaeological remains such as the Irrawang Pottery site, cottages and early subdivisions such as Henry Halloran s 1930s development at Tanilba Bay. Dungog Shire comprises a number of historic villages including Gresford, Paterson, Vacy, Dungog; and Clarence Town which is thought to be the seventh oldest settlement in Australia. 8 PSC Submission

72 Sample of areas of shared values from Community Strategic Plans Port Stephens Council Dungog Shire Council One of the key attractions to residents and visitors Areas of natural beauty and scenic landscapes. in Port Stephens is the natural beauty of the area, characterised by magnificent natural waterways, beaches and rural tranquillity. Waterways and water resources in Port Stephens include extensive groundwater aquifers, freshwater and estuarine wetlands, rivers and streams, dams, estuaries and ocean beaches. These are utilised for a range of purposes including drinking water. Natural ecosystems and a high level of species diversity. Port Stephens Clean Waterways Program. Pristine natural environment which is characterised by unpolluted waterways and clean air. Flora and fauna which support a rich bio-diversity. Healthy rivers. PSC Submission 9

73 (d) Attitude of Residents and Ratepayers the attitude of the residents and ratepayers of the areas concerned Whilst residents of the whole of the Shire of Dungog have not expressed a strong view, residents of Dungog and Clarence Town have during January and February 2016 organised a petition for use in accessing the Boundaries Commission process to lead to a boundary change so that the Williams River Valley would be incorporated into Port Stephens. Section 215 of the Local Government Act 1993 makes the following provision: 215 Who may initiate a proposal? (1) A proposal may be made by the Minister or it may be made to the Minister by a council affected by the proposal or by an appropriate minimum number of electors. (2) An appropriate minimum number of electors is: (a) if a proposal applies to the whole of an area or the proposal is that part of an area be constituted as a new area-250 of the enrolled electors for the existing area or 10 per cent of them, whichever is the greater, or (b) if a proposal applies only to part of an area-250 of the enrolled electors for that part or 10 per cent of them, whichever is the lesser. The option under consideration falls under section 215(2)(b). The residents of the affected area have collected over 1,000 signatures and these represent 14.83% of the electors of the LGA. The petition was collected for the purpose of joining the Williams River Valley with Port Stephens LGA. Whilst it does not meet the criteria of this section of the Act for a whole of Dungog amalgamation it is a strong indicator of the wishes of a significant section of the Dungog LGA s population. Therefore under the process that the Boundaries Commission would be required to follow under Section 218F(3) this petition is a sufficient indication that it should consider this proposal. The residents of Port Stephens have not been consulted on the proposal and it is suggested that a formal poll or survey of residents be undertaken, again under Section 218F(3). Port Stephens Council will consider the impacts on its ratepayers of the option to amalgamate with Dungog Shire and include the implications and impacts in a public information campaign. Both communities need to be consulted closely after a more in depth analysis on the impacts of such a proposal. Morrison Low has provided some indicators of the impacts related to rates, however these are based on averages and more detailed analysis will be undertaken, assuming access to rates information from Dungog Shire Council is available. (e) Representation the requirements of the area concerned in relation to elected representation for residents and ratepayers at the local level, the desirable and appropriate relationship between elected representatives and ratepayers and residents and such other matters as it considers relevant in relation to the past and future patterns of elected representation for that area 10 PSC Submission

74 Port Stephens Council currently has a popularly elected mayor and nine (9) councillors, across three wards. As at 18 January 2016, Port Stephens Council had a total of 51,365 electors. Dungog Shire Council has nine (9) councillors with a Council elected mayor on an annual basis. Dungog Shire Council is divided into three wards. As at 18 January 2016, Dungog Shire Council had a total of 6,744 electors. Under this Option, Port Stephens Council would increase the elector numbers from 51,365 to 58,109. It is envisaged that the newly formed local government area would be divided into three wards with approximately 19,370 electors in each ward with a representation of a popularly elected mayor and nine (9) councillors. Essentially, the elector numbers per councillor would increase slightly, however it would allow the mayor and councillors to maintain a connection with the local communities within a manageable elector base. (e1) the impact of any relevant proposal on the ability of the councils of the areas concerned to provide adequate, equitable and appropriate services and facilities, Council acknowledges that there are challenges related to the infrastructure in this option but the opportunity to improve the overall situation within existing resources puts these challenges into perspective. We have identified some areas that would be likely to provide definite improvements for the residents of Dungog Shire, in areas of services that residents of both LGAs value. For example in the area of waste services: currently Dungog has a two bin service (red and yellow) the same as Port Stephens. This would be easier to work with than trying to merge with the current NCC system of a three bins service. Dungog Shire currently puts all red bin waste into one landfill site in Dungog that has a lifespan currently of around 30 years. (Its yellow bin waste, as with PSC goes to the same recycle plant). Both Councils have recently let 10 year tenders for waste collection, at the conclusion of which there would one tender. Alternatively, given the very small number of bin lifts in Dungog Shire, paying out the contract for one supplier and providing a single service is a financially viable option. Under this merger proposal, residents of Dungog Shire would have immediate access to all Port Stephens drop off facilities where they currently have none; a service could also be supplied at Dungog at little cost. Dungog Shire and Port Stephens Council currently do not meet the State waste targets but PSC is much closer. In a merged entity current Dungog Shire residents waste could be sent to the Raymond Terrace Advanced Resource Recovery Technology facility, thus increasing the amount of waste diversion, which in turn lowers the cost of landfill maintenance and increases the life of the landfill. Dungog Shire residents would also benefit in terms of waste and recycle education programs which could be extended from PSC s current service, again at little to no cost. There would be access to the waste strategic planning services of PSC which currently aren t available in Dungog Shire. It is not possible to make comparisons regarding the waste levy because they are not comparable: Dungog Shire is a rural council and has no extra services provided other than bin collection. In relation to another highly valued local government service libraries both councils are members of the Regional Libraries Agreement: whilst there are no cost savings there are also no additional costs. PSC Submission 11

75 Dungog Shire and Port Stephens Council LGAs have extensive rural road networks, unlike NCC which has no rural roads. Both Dungog and PSC have experience dealing with high speed, low volume roads. Both Councils have worked together on road maintenance and rehabilitation; in 2013 a combined PSC/Dungog/Maitland project in road safety for motor cycles using the rural roads network took out the overall winner in the Road Safety category nationally then the overall winner of the National Awards for Local Government. Without a formal service level review it is difficult to make a definite assessment on services and facilities for a new entity. However it can be assumed that access to the resources currently available to Port Stephens Council would benefit residents of Dungog too. There would also be a potentially stronger alliance between coast and hinterland in tourism marketing with a united local government. 12 PSC Submission

76 (e2) the impact of any relevant proposal on the employment of the staff by the councils of the areas concerned, This proposal acknowledges that services and infrastructure must continue to be provided and envisages that the staff of Dungog Shire who service the area would largely continue to do so. In fact, staff of Port Stephens Council have provided services to this area (e.g. contracted Ranger services, road works) on an ongoing basis; and, in recent storm events on an ad hoc basis for clean-up, emergency management, community services., and Communications. There would be some rationalisation, mainly the position of General Manager and some senior staff. Staff levels for this rural council cannot be diminished under legislation however Dungog Shire has only 65 staff, one of the lowest per capita staff levels in the State. Distances between workforces and staffing constraints under the Act are detrimental to a merger between Dungog and Gloucester Shires, but are not material for a merger with Port Stephens Council. For example, if the Administration Building at Raymond Terrace would be the administrative centre of the merged entity, the present Dungog Shire premises would need to be retained as a service centre. Given that that building is older and does not conform to access standards, some modification would be required but it would accommodate at least existing service levels. It would be necessary to retain the Dungog depot and some efficiency gains are envisaged for placement of plant across the merged entity. Distances are not material: from Raymond Terrace to Dungog is 50kms (46 minutes); Gresford to Raymond Terrace is 50.5kms (45 minutes). By comparison, Raymond Terrace to Fingal Bay is 50.1kms (50 minutes) in the current PSC LGA. Port Stephens Council is renowned for its investment in staff, learning and development and overall industrial relations environment, including a mulita-award winning enterprise agreement. As noted above, Dungog Shire has one of the lowest per capital staff levels in the State. This means that the demands on their time for operational activities leave small openings for professional development and strategic advancement. It is envisaged that particularly as staff of the two Councils can move easily between locations Dungog personnel would have access to any/all opportunities afforded to staff of PSC. This would not involve material extra cost. (e3) the impact of any relevant proposal on rural communities in the areas concerned, The Williams River Valley is a continuum with the western part of Port Stephens LGA and there would be no impact on the rural communities, other than access to any additional services currently enjoyed across the border. Please refer to section (e)1 above regarding services. Aside from the five villages/towns (Dungog, Clarence Town, Gresford, Vacy and Paterson) the Dungog Shire is relatively sparsely populated. In these areas the impacts have yet to be fully understood but would be the subject of further study should this option advance. In any option or proposal this need for further study would apply. (e4) in the case of a proposal for the amalgamation of two or more areas, the desirability (or otherwise) of dividing the resulting area or areas into wards, Under this option, Port Stephens Council would seek to maintain the current three (3) ward structure to ensure adequate representation across the whole local government area. This gives the community a stronger voice in their immediate area of the LGA and a closer connection to the local representatives for their community within the broader local government area. However Port Stephens Council is open to reviewing the ward structure once the views of all stakeholders are canvassed. PSC Submission 13

77 (e5) in the case of a proposal for the amalgamation of two or more areas, the need to ensure that the opinions of each of the diverse communities of the resulting area or areas are effectively represented, As noted above, the detailed views of residents of both areas would need to be canvassed, with emphasis on Port Stephens residents and areas outside the Williams River Valley as the intentions of those in the Williams River Valley are largely known (see point (d) above). (f) Other Factors such other factors as it considers relevant to the provision of efficient and effective local government in the existing and proposed new areas. The proposed merger of Dungog and Gloucester Shire Councils has been ridiculed as being unworkable because: two unfit councils don t make a fit council, just a larger unfit council; the border between Dungog and Gloucester LGAs is the ridge line at the top of the Barrington Tops there are no roads or other access between the two LGAs. People have to travel between Dungog and Gloucester by traversing part of Port Stephens and Great Lakes LGAs to get between these two centres; there is now a strong and viable solution for Gloucester on the table. 14 PSC Submission

78 The proposed merger of Dungog Shire with Maitland City Council: does not have the support of either community; does not have strong community of interest land use, environmental considerations and population size and growth do not synergise; is more expensive for both communities than a merger of Port Stephens Council with Dungog Shire Council. If a more sensible solution is that first proposed by the ILGRP: merge Gloucester with either Great Lakes or Greater Taree Councils, where the community of interest and the geography align, then a sustainable solution for Dungog must be found. For the reasons noted above and put forward in detail in both Dungog and Maitland s submissions to IPART, this option to amalgamate Dungog and Maitland is also not workable. This means that the need for a sustainable solution for Dungog must be canvassed. It is the contention of Port Stephens Council that if stand alone is not an option for either Council then a merger between Port Stephens Council and Dungog Shire Council is the most cost effective and longer term beneficial solution. PSC Submission 15

79 Merger Business Case Port Stephens Council and Dungog Shire Council February 2016

80 Document status Ref Version Approving director Date 7153 Final D Bonifant February 2016 Morrison Low Except for all client data and factual information contained herein, this document is the copyright of Morrison Low Consultants Pty Ltd. All or any part of it may only be used, copied or reproduced for the purpose for which it was originally intended, except where the prior permission to do otherwise has been sought from and granted by Morrison Low Consultants Pty Ltd. Prospective users are invited to make enquiries of Morrison Low Consultants Pty Ltd concerning using all or part of this copyright document for purposes other than that for which it was intended.

81 Contents Executive Summary 1 Background and scope 1 Merger impacts 1 Key risks 2 Introduction 3 Fit for the Future 3 Modelling the proposed merger 4 Reporting 4 Limitations 4 IPART s Assessment of Port Stephens Council and Dungog Shire Council 5 Port Stephens Council 5 Dungog Shire Council 5 Merger proposals: Port Stephens and Newcastle / Dungog and Gloucester 6 About the Councils 7 The Merger 7 Fit for the Future benchmarks 8 Debt 14 Rates 15 Representation 18 Risks arising from merger 24 Appendix A IPART Individual Council Assessments 26 Appendix B Costs and Benefits Arising from Merger of Port Stephens and Dungog Councils 29 Appendix C Assumptions used in Modelling Council Data 39 Appendix D Fit for the Future Benchmarks 40 Morrison Low i

82 Tables Table 1 Council comparator data 7 Table 2 Merged council options performance against Fit for the Future benchmarks 9 Table 3 Comparison of debt 14 Table 4 Comparison of representation 18 Table 5 High level description of financial costs and savings arising from merger 21 Table 6 Summary of financial costs and savings for the merger 22 Table 7 Summary of financial impacts of the merger 23 Figures Figure 1 Proposed council area 8 Figure 2 Operating performance ratio 10 Figure 3 Own source revenue 11 Figure 4 Debt service ratio 11 Figure 5 Maintenance Ratio 12 Figure 6 Asset renewal ratio 12 Figure 7 Infrastructure backlog ratio 13 Figure 8 Asset maintenance ratio 13 Figure 9 Real operating expenditure per capita 14 Figure 10 Comparison of rating revenue by category 15 Figure 11 Current average rate ( ) 16 Figure 12 Impact on average residential rates 17 Figure 13 Impact on average business rates 17 Figure 14 Impact on average farmland rates 18 Morrison Low ii

83 Executive Summary Background and scope Port Stephens Council has commissioned Morrison Low to undertake a high level merger business case to identify the benefits and costs of a potential merger with Dungog Shire Council. This investigation and report is in response to the NSW Minister of Local Government s merger proposal of January 2016 that Port Stephens Council should merge with Newcastle City Council. Up until 18 December 2015 Port Stephens Council was led to believe by the Independent Local Government Review Panel (ILGRP), the Independent Pricing and Regulatory Tribunal (IPART) and the NSW Government that Port Stephens was not subject to consideration for merger. The December announcement was a complete surprise to both the Council and the community. Prior to this announcement Council had not considered the range of merger options or the benefits, if any, for the Port Stephens community or local government in the Hunter Region in general. This report is intended to provide Port Stephens Council with information to respond to the Government s merger proposal through the Boundaries Commission submission process. The short timeframe means that the analysis and this report is a limited study which concentrates on estimating the financial costs and savings from a merger predicting the financial performance of the merged council against the Fit for the Future benchmarks over the period covered by the councils LTFPs comparing that performance against each individual council comparing each council s debt considering the impacts on representation considering the potential risks. The Chief Executive of the Office of Local Government handed down merger proposals and appointed delegates to complete an examination, including public consultation, and report to the Boundaries Commission and to the Minister. Public submissions were due to delegates by the end of February Dungog Shire Council has provided base financial information to assist with this merger option analysis. This data is consistent with the financial information used to assess the merger implications of Dungog and Maitland and Dungog and Gloucester. The balance of the data within this report relating to Dungog is based on publicly available information. Merger impacts For the purposes of this report, the merger has been modelled based on a business case approach and incorporates the incurring of amalgamation costs and the achievement of a range of benefits as a result of the merger. The model identifies that a merger of Dungog and Port Stephens would result in financial costs and savings, and produce a range of impacts on the councils and their communities. Morrison Low 1

84 The details of costs and benefits and the assumptions are explained in more detail in Appendix B. Model outputs This model results in a net financial cost of $2.4M 1 over nine years -the life of the combined long term financial plan (LTFP). If the LTFP is extrapolated for 20 years, the net financial cost rises to $12.2M The net present value (NPV) of benefits and costs from the merger are discounted at 9.5% over nine years, from 2017 to 2024 Benefits from the merger include assumption that a $5M grant from the NSW Government to assist with merger costs will be made available. The Government has not indicated any grant will be available but a grant of this amount is consistent with other merger proposals of similar councils Five of the financial benchmarks are met within the required timeframes with the Infrastructure Backlog Ratio and the Asset Maintenance Ratio not achieving benchmark over the LTFP horizon (2024) The Operating Performance Ratio achieves the benchmark in 2018 and remains above the benchmark for the remainder of the LTFP horizon. This indicates the ability to increase expenditure on assets if required Levels of representation currently experienced by the Port Stephens community (one councillor per 7,049 residents) would be reduced to one councillor per 8,789 residents. Dungog residents would receive dramatically reduced representation than the current one councillor per 957 residents Neither Port Stephens nor Dungog residents have been consulted on the two councils merging although a larger portion of Dungog residents have petitioned the Minster of Local Government for boundary adjustments to merge parts of Dungog with Port Stephens This report does not address scale and capacity as it has been determined, through IPART s assessment, that Port Stephens met scale and capacity, and therefore it is assumed that a merger of Dungog and Port Stephens would meet the scale and capacity criteria. Key risks The merger of the two councils also creates a range of risks that would need to be managed. In our view the key priorities for the councils, if this proposed merger proceeds, and recognising the risks inherent with any such change to local government, are: 1. Managing the transition from the existing councils into a new merged council. 2. Continuing to fund the infrastructure needs of the combined council and apportioning the costs of renewing and upgrading infrastructure in a fair and equitable manner. 3. Addressing the needs of different communities of interest within a merged council area. 4. Managing the apparent impact of any staff changes which, as the legislation currently stands, will impact staff employed in the proposed merger. 1 Net Present Value Morrison Low 2

85 Introduction Fit for the Future In 2011, local councils from throughout NSW gathered for a summit, Destination 2036, to plan how local government could meet the challenges of the future. As a result, councils agreed that change was needed and that they wanted to be strong and sustainable and to make a positive difference in their respective communities. However, there were various views as to how this could be achieved, and in April 2012 the State Government appointed an independent expert panel to carry out a review of the sector. That Independent Local Government Review Panel consulted widely in developing its final recommendations, which were presented to the Government in late The panel concluded that for councils to become strong and sustainable both the NSW Government and the local government sector would have to play a part. The State indicated its preparedness to change the way it works with councils and to support them through meaningful reform. Local councils must also be prepared to consider new ways of working and new structural arrangements. The Fit for the Future program aims to bring these changes together to lay the foundations for a stronger system of local government and stronger local communities. The Fit for the Future program requires councils to actively assess their scale and capacity in achieving long term sustainability, and for councils to submit proposals to the Government indicating how they will achieve these objectives. All councils were required to submit a proposal to be or become fit by 30 June IPART was appointed by the Minister for Local Government as the Expert Advisory Panel to review all local council Fit for the Future proposals. South Australian local government expert John Comrie was appointed to support IPART in the process. IPART published a methodology for the assessment of proposals 2. In October 2015 IPART released its report 3 into the review of council proposals finding them either fit or unfit, largely on the scale and capacity assessment of the ILGRP or where the councils failed to demonstrate financial sustainability. Councils were given until 18 November 2015 to respond. Subsequently, on 18 December 2015, The Minister for Local Government (OLG) released merger proposals for examination and report under the Local Government Act (the Act). The Chief Executive of OLG has delegated the examination and reporting function to a series of delegates. In examining and reporting on merger proposals, delegates will conduct a public inquiry, call for written submissions, and prepare a report with due regard to the factors in the Act. These include financial considerations, communities of interest, elected representation, employment of staff, services and facilities, and the attitude of residents and ratepayers. The reports will go to the Boundaries Commission for recommendation, and then to the Minister for determination. 2 Methodology for Assessment of Council Fit for the Future Proposals, Consultation Paper, April Assessment of Council Fit for the Future Proposals, Local Government Final Report, October 2015 Morrison Low 3

86 Modelling the proposed merger Port Stephens has commissioned Morrison Low to undertake a high level merger business case analysis of a proposed merger of Port Stephens Council and Dungog Shire Council. The modelling was undertaken on the basis of using publicly available information such as long term financial plans, annual statements, annual reports and submissions to IPART in order to ensure consistency across the Councils. This was augmented by further information provided by both Port Stephens and Dungog Councils. The modelling is intended to allow the council to understand what the benefits and dis-benefits of the proposed merger are. It has involved analysing historic, current and forecast performance as well as drawing in information from other jurisdictions in which we have been involved in local government reform (for example, transitional costs). Reporting This report has been prepared to provide the key information required for Port Stephens Council to use in determining what is in the best interests of the council and community. As such, it does not seek to make a recommendation. The report focuses on performance against the seven benchmarks and a short summary of some key potential advantages and disadvantages. The relative weighting that council then applies will be based on what the Council and its community consider most important. Limitations The timeframes imposed on Council for preparation of their submission to the Boundaries Commission have made the completion of this project challenging. Notwithstanding that we fully understand the need for those tight timeframes, that understanding is tempered with recognition that the data available for modelling has some limitations as a result. Data has not been standardised across the two councils involved. Data or issues that fall outside an expected range or are considered by Morrison Low to raise a risk have been identified within this report. The data provided within the model is drawn from a variety of sources however it is acknowledged that the timeframe limits our capacity to refine both the available data and the model itself to a fine level of detail. For consistency across the councils, publicly available information has formed the basis of the analysis. Due to time constraints the financial data sourced from each council has had to be taken at face value and has not been interrogated with each council, unless otherwise stated. The LTFP of Dungog Shire Council has been updated to exclude the proposed special rates variation (SRV) and therefore the revised LTFP now reduces the amount of asset renewal impacting the infrastructure backlog. Morrison Low 4

87 IPART s Assessment of Port Stephens Council and Dungog Shire Council Port Stephens Council The ILGRP indicated that Port Stephens Council appeared likely to remain sustainable, in its present form, well into the future and there were no pressing boundary issues. In the Fit for the Future process the Council submitted a stand-alone proposal that did not include any boundary changes. IPART s report, Assessment of Council Fit for the Future Proposals 4, found that Port Stephens Council was fit as a stand-alone council. IPARTs assessment stated that it believed Port Stephens Council met all scale and capacity as well as satisfying all financial criteria. This was consistent with the ILGRP s stand-alone option. IPARTs individual council assessments are attached as Appendix A. Dungog Shire Council The ILGRP indicated that Dungog Shire Council did not appear financially sustainable and noted that it had received a distressed rating in DLG s Infrastructure Audit. ILGRP also noted that Dungog Council had its own reservations about its capacity to meet infrastructure obligations in the medium term. It concluded that the assessment should consider the option of Dungog merging with Maitland Council. IPARTs report, Assessment of Council Fit for the Future Proposals 5, found that Dungog Shire Council was not fit and that it should merger with Maitland. Dungog Shire Council failed to satisfy the scale and capacity criteria and the financial criteria 6. The Council had submitted a Council Improvement Proposal (CIP) and IPART found that: the Council did not demonstrate its proposal to stand alone would be as good as, or better than, the ILGRP preferred merger and the merger option would provide significant further benefits although Dungog satisfies the criterion for infrastructure and service management, it fails to meet the criterion for sustainability and efficiency the sustainability criterion is not because the achievement of the Operating Performance Ratio includes the assumption of a large proposed special rate variation of 108.2% over six years, which may be unreasonable achieving the Own Source Revenue Ratio by the designated period is also dependent on Dungog achieving the proposed special rate variation Dungog s population forecast is 8,800 by 2031 with analysis suggesting an insufficient scale to costeffectively deliver services to the community and partner effectively with governments n terms of scale and capacity, Dungog is seen as having a small revenue base, limited staff and capacity to provide improved services and significant challenges overcoming its infrastructure backlog. 4 Assessment of Council Fit for the Future Proposals, Local Government Final Report, October 2015, pg Assessment of Council Fit for the Future Proposals, Local Government Final Report, October Assessment of Council Fit for the Future Proposals, Local Government Final Report, October 2015, pg Morrison Low 5

88 IPART formed the view that if Dungog Shire Council merged with Maitland City Council it would assist by producing a benefit, including the government grant, as opposed to a net cost of $6.1M as suggested in the submitted business case. In the period that followed the release of the IPART report, Dungog Shire Council reconfirmed its resolution to remain stand alone and not merge with Maitland. In January 2016, the NSW Government released the merger proposal for Dungog Shire Council and Gloucester Shire Council. The modelling, undertaken for the NSW Government by KPMG, stated that a merger of the two councils would generate $19M in benefits and $4M in net savings over 20 years and, further to that, these would equate to approximately $500,000 of saving per annum from The Government suggested these savings would reduce the reliance on special rates variations (SRVs) by both councils (Dungog was proposing a cumulative 92% increase over six years and Gloucester a cumulative increase of 37% over three years to meet the required benchmarks) and that these savings would create capacity to address the infrastructure gap of both the councils ($102M combined infrastructure backlog, as calculated by KPMG). Merger proposals: Port Stephens and Newcastle / Dungog and Gloucester On the 18 th of December 2015, the NSW Government announced a proposal to merge Port Stephens with Newcastle and Dungog with Gloucester and in early January 2016 released its formal proposals. 7 The proposals contain a number of inaccuracies and generalisations that are not applicable to the potential merger of Newcastle with Port Stephens and Dungog with Gloucester. For example, in the Port Stephens and Newcastle merger, both councils indicate they do not require further special rate variations to fund infrastructure nor do they have unmanaged infrastructure backlog. Given the inaccuracies in the NSW Government merger proposal and KPMG analysis and due to communities of interest, Port Stephens Council has commissioned this business case to better understand any implications of merging with Dungog. 7 NSW Government Merger Proposal: Newcastle Port Stephens and Dungog Gloucester, January Morrison Low 6

89 About the Councils A comparison of the existing councils and the merged council is set out below. Table 1 Council comparator data Dungog Shire Council Port Stephens Council Merged Council Full time equivalent staff Geographic area 9 2,250km 2 859km 2 3,109km 2 Population 10 8,590 69,728 78,318 Population projection ,800 88,900 97,700 Annual expenditure 12 ($ million) $11M $107M $118M Number of councillors The Merger The proposed merger would bring together two councils in the Hunter with a combined population of around 78,318 in an area of 3,109km 2. The following map shows the two council areas. 8 Financial Statements NSW Government Merger Proposal January NSW Government Merger Proposal January NSW Department of Planning and Environment, New South Wales State and Local Government Area Population Projections: 2014 Final Actuals, excluding water and sewerage 13 Morrison Low merger model Port Stephens and Dungog February 2016 Morrison Low 7

90 Figure 1 Proposed council area Dungog Port Stephens Fit for the Future benchmarks The merger of the two councils is the sum of the parts. This means that the asset and financial positon of each council directly contributes to the overall asset and financial position of the merged council. The modelling combines the projected expenditure of each council on assets (new capital, renewals and maintenance) as the basis for the merged councils projected expenditure on assets. While there are significant transitional costs identified in this report which mean the Operating Performance Ratio of the proposed merger is initially negative, the improving financial sustainability of each of the councils and the efficiency benefits modelled as arising through the merger improves the financial performance of the merged council. While there is lesser requirement on the merged council to meet the benchmarks, it is important to test whether the merged council performs better or worse than its standalone, constituent councils. The graphs below summarise the merged council performance against the benchmarks with actual performance year on year set out in the figures below. IPART has set 2020 as the year by which benchmarks for metropolitan or regional councils must be met or must show improvement. The benchmarks which must be met by 2020 are the first three measures shown in the table below (these are italicised). These targets are likely to be applied to the merged council. Morrison Low 8

91 Asset Maintenance Ratio The calculation of the maintenance ratio is based on the number each council reports as required maintenance. There are no clear guidelines as to how required maintenance is to be calculated and as such the approach varies significantly across NSW. Each council s assessment of required maintenance is assumed to represent the actual amount required to maintain their assets in an appropriate condition, and the merged council uses the combination of each council s assessment of required maintenance. Infrastructure Backlog Ratio For the purposes of this report each council s assessment of the infrastructure backlog has been assumed to represent the actual amount and combined to represent the backlog of the merged council. Achievement of Benchmarks The table below summarises the merged council performance against the benchmarks with actual performance year on year set out in the figures following. IPART has set 2020 as the year by which some benchmarks for regional councils must be met and others must show improvement and the merged council is shown to meet all benchmarks by this date. The benchmarks which must be met by 2020 are the first three measures shown in the table; these have been italicised. We note that merging councils may be given an extended period to meet the benchmarks, however for the purposes of this report, we have assumed these targets are likely to be applied to the merged council. Table 2 Merged council options performance against Fit for the Future benchmarks Indicator for 2020 Port Stephens and Dungog Merger Operating Performance Meets the benchmark Own Source Revenue Meets the benchmark Debt Service Cover Meets the benchmark Asset Maintenance Does not meet the benchmark Asset Renewal Meets the benchmark Infrastructure Backlog Does not meet the benchmark Real Operating Expenditure Meets the benchmark Morrison Low 9

92 The merged council meets four of the indicators during the whole of the modelled period: Own Source Revenue, Debt Service Cover, Asset Renewal Ratio and Real Operating Expenditure. Of the measures not met throughout the entire period the Operating Performance Ratio is minus 1.7% in 2017 then increases to meet the breakeven benchmark in 2018, and the ratio continues to climb over the remainder of the LTFP horizon the improvement in the Operating Performance Ratio reflects the impact of the transitional costs and in later years the impact of efficiencies generated from the merger, as well as the forecasted improved financial positions by both councils the Infrastructure Backlog Ratio commences at 3.7% in 2017 and gradually improves to 2.9% by 2024 but never meets the 2.0% annual benchmark. This is due to the high backlog in Dungog the Asset Maintenance Ratio climbs from 83.5% in 2017 to 92.5% in 2024 and never reaches the 100% benchmark ratio the Real Operating Expenditure per Capita Ratio achieves the required criteria of a decrease over time. The performance against the benchmarks overtime is set out in the graphs below with the results in each case compared to the performance of council over the same time period. Figure 2 Operating performance ratio 10.0% Operating Performance Ratio 0.0% % Percentage -20.0% -30.0% -40.0% -50.0% Year Port Stephens Dungog Port Stephens and Dungog Benchmark Morrison Low 10

93 Figure 3 Own source revenue 85.0% Own Source Revenue Ratio 80.0% 75.0% 70.0% Percentage 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% Year Port Stephens Dungog Port Stephens and Dungog Benchmark Figure 4 Debt service ratio 25.0% Debt Service Ratio 20.0% Percentage 15.0% 10.0% 5.0% 0.0% Year Port Stephens Dungog Port Stephens and Dungog Benchmark (Lower) Benchmark (Upper) Morrison Low 11

94 Figure 5 Maintenance Ratio 105.0% Asset Maintenance Ratio 95.0% 85.0% Percentage 75.0% 65.0% 55.0% 45.0% Year Port Stephens Dungog Port Stephens and Dungog Benchmark Figure 6 Asset renewal ratio 200.0% Building and Infrastructure Asset Renewal Ratio 180.0% 160.0% 140.0% Percentage 120.0% 100.0% 80.0% 60.0% 40.0% Year Port Stephens Dungog Port Stephens and Dungog Benchmark Morrison Low 12

95 Figure 7 Infrastructure backlog ratio Infrastructure Backlog Ratio Percentage 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Year Port Stephens Dungog Port Stephens and Dungog Benchmark Figure 8 Asset maintenance ratio 105.0% Asset Maintenance Ratio 95.0% 85.0% Percentage 75.0% 65.0% 55.0% 45.0% Year Port Stephens Dungog Port Stephens and Dungog Benchmark Morrison Low 13

96 Figure 9 Real operating expenditure per capita Real Operating Expenditure per Capita $1,800 $1,700 $1,600 $1,500 Expenditure / Capita $1,400 $1,300 $1,200 $1,100 $1,000 $900 $ Year Port Stephens Dungog Port Stephens and Dungog Debt The councils carry different levels of debt. Port Stephens carries much greater debt, and on a population basis, the per capita debt of Port Stephens is 33 times that of Dungog. While both councils meet the Debt Service Ratio, taking on the debt of other communities can often be a significant issue to manage in a transition to a merged council. The table below highlights the differences in debt levels between the councils. Table 3 Comparison of debt 14 Council Debt ($000) Debt Service Ratio Debt per Capita ($) Dungog $ % $82 Port Stephens $23, % $328 Merged Council $23, % $ Based on 2015 Actual Morrison Low 14

97 Rates Rates under the merged council are frozen at current levels for the first four years of the new council, however after this restriction expires the new council will need to address any inequities in a new rating structure. It is important to note that in its Council Improvement Proposal, Dungog Shire Council had proposed a special rates variation over six years totalling 92% to become sustainable and fund its infrastructure gap. This was considered unreasonable by the Government. Modelling the changes in rates in a merger is very difficult to do with any degree of accuracy as there are a number of significant differences in the rating systems of the two councils which impact on the rates charged to an individual property. Any of the merger options would need to align the rates over time across the communities that would then be contained within a single council area. The modelling of current rates for the two councils is set out below, highlighting the existing differences as well as the different approaches. Based on current rating undertaken by each council, a merged council would have a rating revenue of $43.4M, with 88% being drawn from Port Stephens and the remaining 12% being drawn from Dungog. Figure 10 Comparison of rating revenue by category Rate Yield % Comparison 2015/ % 80.00% 70.00% 78% 60.00% 50.00% 40.00% 30.00% 40% 54% 20.00% 10.00% 0.00% 19% 6% 2% Farmland Residential Business Port Stephen Dungog There are significant differences in where councils source their rates from. Port Stephens obtains 78% of its rating income from residential ratepayers while this source of rates accounts for 54% of the income in Dungog. Dungog derives 40% of rates from farmland, as opposed to 2% in Port Stephens. The Port Stephens business rating category contributes three times as much, proportionally, of the total rating income. Morrison Low 15

98 There are some significant differences between the average rates, particularly with the business rates and, to a lesser extent, the residential and farmland rates. In the case of the business rates, this is reflective of the differing natures of the two councils, with the regional centres having a greater number of businesses and some larger businesses which attract a higher proportion of rates. Figure 11 Current average rate ( ) Average Rates Comparison 2015/16 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Farmland Residential Business Port Stephen Dungog In order to provide information on what the potential impact of a merger on rates would be, representative examples have been modelled by redistributing the 2014/15 rates without adjusting the rating structures. Two scenarios have been used based on the total rate revenue (residential and business) of the two councils. In each scenario the total rates (residential, business or farmland) are apportioned across the two councils consistently. Scenario 1 is entirely ad valorem and Scenario 2 provides for a base charge to be set at the maximum level with the remainder ad valorem. The key drivers are therefore land values and the differences in the way in which councils currently allocate rates between categories. The actual impact on any property or properties will be the result of the actual rating structure chosen by any new council and how quickly, after the period where the current model must be retained, that a merged council decides to adopt and then implement a single rating structure. Within each council area there will be individual properties that are affected in different ways by the changes due to categorisation and land valuation issues. It is apparent that neither of the current rating structures will provide for an equitable distribution of the rating apportionment in a merged council, especially in the business category. The changes suggest that a new rating apportionment model will be required by a merged council to fairly distribute rates between communities and land use types. Morrison Low 16

99 Figure 12 Impact on average residential rates 25% Percentage Change in Average Residential Rates 20% 15% 17% 19% 10% All Ad valorem Base Rate 5% 0% -5% -2% -2% Port Stephen Dungog Figure 13 Impact on average business rates 200% Percentage Change in Average Business Rates 182% 150% 100% 50% 57% All Ad valorem Base Rate 0% -3% -8% -50% Port Stephen Dungog Morrison Low 17

100 Figure 14 Impact on average farmland rates 10% 5% Percentage Change in Average Farmland Rates 4% 7% 0% -5% -10% -2% All Ad valorem Base Rate -15% -20% -18% Port Stephen Dungog Representation One of the greatest negative impacts from a merger of the councils is on representation. The number of people represented by each councillor will increase significantly under a merger, making it more difficult for residents to access their councillors and the council. Port Macquarie Hasting Council is of similar size to a merged Dungog and Port Stephens Council and has nine councillors. Using that as a reference point, each councillor would represent 8,789 residents in the merged council. Port Stephens residents will receive less representation than they are accustomed to, while Dungog residents will receive dramatically less representation than currently, as shown in the table below. Table 4 Comparison of representation Council Councillors Representation (population / Councillor) 15 Dungog Port Stephens 10 7,049 Merged Council 9 8, NSW Government Merger Proposal January 2016 Morrison Low 18

101 While measures can be put in place to address a loss of representation through local or community boards, at present the Government has not set out in detail any proposal that the community could consider and the costs of such are not factored in. Financial costs and savings of the merger The costs and savings of the mergers arise throughout the period being modelled. The costs and savings should not be considered in isolation. They only form part of the information on which a decision should be made and in particular the overall financial performance of the merged council and projected asset expenditure. In the initial transition period, for both scenarios, there are costs associated with creating the single entity (structure, process, policies, systems and branding). Costs continue to arise through redundancies of senior staff and the implementation of a single IT system across the new council, which has significant cost implications. Further costs arise in the medium and longer term largely from redundancy costs (one off) but increasingly from an overall increase in staff numbers which is typical of merged councils and considered to arise as a result of increased services and service levels. Savings initially arise in the short term through the reduction in the number of senior staff and councillors required in comparison to the councils combined. Natural attrition is initially applied to a merger, with efficiencies meaning that overall staff numbers fall in the short term. Also in the medium and longer term, benefits arise through reducing the overall staff numbers with a focus on removing the duplication of roles and creating greater efficiency in operations and the rationalisation of buildings and plant (one off). Tables 5 and 7 provide a summary, narrative and financials of the costs and savings of the merger. The detailed assumptions are in Appendix B. The costs and savings arising from the merger are in comparison to the current operating costs of the combined councils. The merged council is modelled on the basis of a combined LTFP where all council costs and revenues set out in the LTFP are brought together. Actual data from the latest financial year (2014/15) has been inserted into that year and this have been compared to the LTFP projections. When loading data for each individual council every effort has been made to ensure the best available data has been used and any specific assumptions and adjustments for individual councils are noted in Appendix C. The combined council s LTFPs have then been adjusted by the costs and savings of the merger with Short (1-3 years), Medium (4 5 years) and Long Term (6 10 years) time horizons. For simplicity, all transitional costs are modelled as taking place within the first three years. The NPV 16 of the costs and savings over the period being modelled ( ) has been calculated, and overall the modelling projects a financial impact to the two communities arising from the merger of Port Stephens and Dungog. The NPV of projected costs and savings arising from the mergers projected until 2024 with a discount rate of 9.5% and including the government grant for mergers are an estimated: $2.4 million net financial cost 16 Using a nominal discount rate of 9.5% is the period being modelled to match the time covered by all Council LTFPs Morrison Low 19

102 The Government s standard approach to merger proposals uses a period of 20 years for the calculation of costs and benefits, which is beyond that considered by the councils. We do not presumed that councils, or the priorities and constraints under which they operate, will remain static into the future and recognise that any resulting modelling over such a long period is most likely to be inaccurate. This concern aside for the purposes of providing a 20 year comparison we have extrapolated the costs and benefit. The NPV of projected costs and savings arising from the mergers projected for 20 years with a discount rate of 9.5% and including the government grant for mergers are an estimated: $12.2 million net financial cost These costs should be seen in context of the timeframe over which they arise and the overall financial performance of the merged council, and in particular the need for the organisation to increase asset expenditure to meet the Fit for the Future benchmarks. Morrison Low 20

103 Table 5 Item High level description of financial costs and savings arising from merger Short Term (1 3 years) Medium term (4 5 years) Long Term (6-10 years) Cost Benefit Cost Benefit Cost Benefit Governance Reduction in total cost of councillors Staff Redundancy costs associated with senior staff Harmonisation Reduction in total staff costs through natural attrition Increase in staff costs associated with typical increase in services and service levels from merger harmonisation Increase in staff costs associated with typical increase in services and service levels from merger harmonisation Materials and Contracts IT Assets Transitional Body Significant costs to move to combined IT system across entire council Establish council and structure, policies, procedures Temporary accommodation Branding and signage Nil Nil Nil Government grant Rationalisation of plant and fleet Benefits arise from single IT system and decrease in staff Morrison Low 21

104 Table 6 Summary of financial costs and savings for the merger Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Governance Staff - Redundancies Staff cost changes , ,659 2,750 3,900 IT - Transition costs 2,400 1, Long term benefits Materials and Contracts Assets - Plant and fleet Buildings Grants and Government Contributions -5,000 Transitional Costs - Transitional body 2,000 - Rebranding / accommodation 800 Total ,108-1, ,161 2,239 3, The table provides a simple representation of costs and benefits which in the modelling are subject to appropriate inflationary adjustments 19 Costs are shown as positive figures, savings as negative from Year 1 (2017) to year 8 (2024) Morrison Low 22

105 Table 7 Summary of financial impacts of the merger Port Stephens, Dungog, Councils Morrison Low Fit For Future Analysis Selected Councils Combined LTFP /15 Extrapolated HOME Actual Actual LTFP (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s) Operating Results Income Statement Source: Council Financial Statements and Long Term Financial Plan (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s) Rates & Annual Charges 53,271 55,891 57,506 59,311 61,065 62,864 64,713 66,613 68,565 70,570 72,630 User Fees & Charges 36,056 34,046 36,524 37,445 38,388 39,356 40,349 41,367 42,409 43,479 44,576 Grants & Contributions - Operations 13,185 16,963 15,224 21,014 16,006 17,061 17,731 18,077 18,551 19,182 19,620 Grants & Contributions for Capital 16,823 20,331 12,866 11,723 12,425 12,081 12,140 12,539 12,832 12,984 13,351 Interest and Investment Income 2,197 2,062 1,980 2,362 2,477 2,651 2,917 3,121 3,180 3,352 3,542 Gains from disposal assets , Other Income 7,320 8,421 6,341 6,499 6,662 6,828 6,999 7,174 7,354 7,537 7,726 Total Income 129, , , , , , , , , , ,695 Income excl Gains\losses 128, , , , , , , , , , ,445 Income excl Gains\losses & Capital Grants 112, , , , , , , , , , ,094 Expenses Borrowing Costs 1,503 1, Employee Benefits 39,844 43,043 40,588 42,116 43,026 44,204 46,224 48,055 49,922 51,820 53,747 Gains & losses on disposal 504 2, Depreciation & Amortisation 19,093 20,098 22,425 22,534 22,815 23,085 23,347 23,419 23,837 24,241 24,631 All other Expenses 51,456 59,656 54,624 60,294 57,656 58,252 59,283 60,750 62,017 63,551 65,121 Total Expenses 112, , , , , , , , , , ,616 Operating Result 17,297 11,393 13,828 12,988 13,234 15,125 16,407 16,656 17,157 17,581 18,079 Operating Result before grants & contributions for capital purposes 474-8, , ,044 4,267 4,117 4,325 4,597 4,728 Morrison Low 23

106 Risks arising from merger There are a number of significant potential financial and non-financial risks arising from this particular merger that will need to be considered, including the following. Transitional costs may be more significant than set out in the business case The efficiencies projected in the business case may not be delivered Savings through any reduction in staff are likely to only impact the largest community The implementation costs maybe higher and the anticipated savings may not be achieved Decisions subsequent to the merger about the rationalisation of facilities and services may not reduce the cost base of the merged organisation as originally planned The cultural integration of the council organisations may not go well, resulting in low morale, increased staff turnover rate etc. This would reduce business performance and prolong the time it takes for the predicted efficiencies to be achieved Service levels rise across the merged council, standardising on the highest level of those services that are being integrated New services are introduced that are not currently delivered in one or more of the former council areas The financial performance of the merged council is less than that modelled (especially given our approach to adjusting the Dungog LTFP in the absence of any special rates variation) and this may result in the need to either reduce services, find further efficiency gains and/or increase rates to address the operating deficit Developing a governance model that represents the communities of interest across the proposed merger area There are significant potential risks arising from the merger both in a financial and non-financial sense. The obvious financial risks are that the transitional costs may be more significant than set out in the business case or that the efficiencies projected in the business case are not delivered. The business case is high level, and implementation costs and attaining the savings will be difficult to achieve. If, for example, the Council chooses not to follow through with the projected efficiencies, this will affect the financial viability of the merged council. Similarly, decisions made subsequent to the merger about the rationalisation of facilities and services may not reduce the cost base of the merged organisation as originally planned. Careful consideration of the issue of cultural integration will be required, and the most consistent remedy to these particular risks is, in our view, strong and consistent leadership. Corporate culture misalignment during the post-merger integration phase often means the employees will dig in, form cliques and protect the old culture. In addition to decreased morale and an increased staff turnover rate, culture misalignment reduces business performance. It also prolongs the time it takes for the predicted efficiencies to be achieved. Morrison Low 24

107 The integration of services with differing service levels often leads to standardising those service levels at the highest level of those services that are being integrated. This is quite often a response to a natural desire to deliver the best possible services to communities as well as the need to balance service levels to community expectations across the whole area. However, it does pose the risk of increased delivery costs and/or lost savings opportunities. Similarly, introducing services that are not currently delivered in one or more of the former council areas to the whole of the new council area will incur additional costs. The impact of a reduction in service levels by either council has not been fully felt by the community or asset management practices. Additionally, the Government has assured communities that service levels would not drop from mergers. Alongside these typical risks arising from a merger any reduced financial performance would be likely to lead to the new council having to review services and service levels to seek significant further efficiency gains and/or increase rates to address the operating deficit. Potential risks The restructuring of any business activity is always a source of potential risk and the merging of council organisations is no exception. A proper risk assessment and mitigation process is an essential component of any structured merger activity. Notwithstanding the above, this report is not intended to incorporate or deliver a detailed risk management strategy for any merger of the councils. However, it is possible to at least identify the major risks involved in the process from a strategic perspective. Subsequent events and policy decisions The primary risk is that the efficiencies projected in the business case are not delivered. This can occur for a variety of reasons; however, the highest risk is that subsequent events are inconsistent with the assumptions or recommendations made during the process. Those events may arise from regulatory changes between analysis and delivery or subsequent policy decisions about service levels or priorities. As an example, a policy decision to adopt a no forced redundancies position after the statutory moratorium expires is unlikely to deliver on the financial savings proposed. Similarly, decisions made subsequent to the merger about the rationalisation of facilities and services may not reduce the cost base of the merged organisation as originally planned. Morrison Low 25

108 Appendix A IPART Individual Council Assessments Morrison Low 26

109 Morrison Low 27

110 Morrison Low 28

111 Appendix B Costs and Benefits Arising from Merger of Port Stephens and Dungog Councils Costs and benefits identified below form the basis of the modelling referred to throughout the report. Costs outlined are one-off unless stated otherwise whereas benefits continue to accrue each year unless stated otherwise. For the purposes of comparison, cost or benefits associated with a merger of Port Stephens and Dungog are identified and explained for each broad category in the business case. Assumptions have been made using the best available information including analysis of various reports on, and estimates of, merger costs in other similar situations. This has been supplemented with the professional opinion of Morrison Low staff based on experience, including with the Auckland Transition Authority (ATA). Queensland Treasury Corporation August 2009 Report In an August 2009 report 20 from the Queensland Treasury Corporation reporting on costs associated with the amalgamation of the Western Downs Regional Council, the report said: A net cost outcome in the first local government term is likely as local governments will incur most of their amalgamation costs prior to, and in the two to three years subsequent to, amalgamation. These costs then taper off. However, the savings resulting from amalgamation are likely to gradually increase over time through - greater efficiency (i.e. a reduction in costs through improved economies of scale) - Improved decision making capability, and - Improved capacity to deliver services. While Western Downs only identified minor potential future benefits, it is likely that benefits will be generated from a reduction in CEO wages, natural attrition and procurement efficiencies etc., while providing existing services at current service standards. It is noted that Western Downs has been able to extend the delivery of certain services across the local government area. Queensland Treasury also provided comment on the reality that local government is different from businesses and that it can be difficult to measure benefits from mergers on a commercial basis: Businesses generally undertake amalgamations and mergers on the basis of a number of factors such as cost savings, increased market share, improved synergies and improved decision making capability. Generally, these factors are measured in the context of reduced staff numbers, reduced operating costs, improved profitability, increased market share and higher share prices. With local government these benefits are more difficult to measure as local governments may utilise savings achieved from improved economies of scale to increase the range and/or to improve the quality of services offered. As a consequence, the cost savings of amalgamation of local governments do not generally show up as improved profitability (i.e. operating surpluses). Similarly, improved decision making capability results in more effective decisions and better outcomes to residents but may not be reflected in a local government s bottom line. This is because local governments, unlike the private sector, are not in 20 Queensland Treasury Corporation - Review of Amalgamation Costs Funding Submission of Western Downs Regional Council, August 2009 Morrison Low 29

112 the business of making profits. Therefore, it is more difficult to measure the cost savings resulting from amalgamation of local governments than it is for corporations as the benefits will generally be utilised by the amalgamated local government in the provision of services. Alan Morton in his report titled Outcomes from Major Structural Change of Local Government, which was released in July 2007, estimated administrative cost savings from the Cairns, Ipswich and Gold Coast amalgamations of 1992/93 were between 1.1 per cent and 3.1 per cent. The report also stated that the South Australian Government estimated savings of 3.0 per cent to 5.0 per cent of expenditure resulting from amalgamation. These estimates focused on administrative efficiency rather than the outcomes achieved through improved local government decision making capability. A potential measure of improved local government capability is ratepayer satisfaction. Alan Morton, together with the company Market Facts, undertook a survey of ratepayers of the five amalgamated local governments in 1992/93. The outcome of this survey was very positive and it indicated that over double the number of ratepayers considered the amalgamations were successful compared to those that thought the amalgamations were unsuccessful. This is considered a good outcome considering the main ratepayer concerns surrounding amalgamation are loss of jobs and loss of access to elected officials. QTC has not been asked to comment on improved capability. The costs and benefits that Morrison Low has modelled for a possible merger of the two Councils are described below. 1 Governance and executive team The formation of a new entity is likely to produce some efficiencies as the result of a new governance model and rationalisation of the existing executive management teams. For the purposes of this review the governance category includes the costs associated with elected members, council committees and related democratic services and processes and the executive team. The table below summarises the expected efficiencies together with the associated timing for governance. Staff Duplicated Services Elected Members On Costs Transition Period Short Term (1 to 3 years) Medium Term (3 to 5 years) Long Term (5 years plus) Nil Nil Nil Nil Streamlined Management (General Managers and Directors) Natural attrition (voluntary) Streamlined Management and staff Natural attrition (voluntary) General managers, directors, Mayoral/GM support council/committee secretarial support Reduced councillors and remuneration Staff associated costs e.g. HR, accommodation, computers, vehicles Staff associated costs e.g. HR, accommodation, computers, vehicles Morrison Low 30

113 1.1 Governance ($154K saving) The formation on a new entity is expected to result in efficiencies resulting from a new governance model and a reduction in the number of existing mayors and councillors. However, this will depend directly on the adopted governance structure including the number of councillors. Estimated governance costs for the new entity have been based on the councillor fees and expenses of Port Macquarie, Hastings Council as reported in the Annual Report It is assumed that there would be nine elected members, as suggested in the merger proposal. 1.2 Executive management ($250k saving) The formation of a single entity is likely to result in efficiencies due to an overall rationalisation in the total number of executive managers required at the Tier 1 (General Managers) and Tier 2 (Directors). Revised remuneration packages for the new general manager and directors for the new entity have been informed and assumed to be similar to that of the Port Macquarie, Hastings Council executive remuneration packages, given the size and scale, to that of the proposed new entity. The general managers total remuneration for the Councils was based on the Councils respective Annual Reports 2014/15, and the amalgamation to a single entity with a single general manager has the potential saving of approximately $250k. In addition, there could be a rationalisation of the existing director positions. However, on the basis of director numbers in Port Stephens and Dungog, we believe there will be no rationalisation in this merger business case with therefore no additional savings. It is important to note that while ongoing efficiencies have been identified as effective from the short term, there is the one off cost of redundancies of approximately $200k that in our experience is a cost incurred during the transition period. This redundancy cost is based on 38 weeks. 1.3 Rationalisation of services Under a single entity a number of the existing governance services would be duplicated and there would be an opportunity to investigate rationalising resourcing requirements for a single entity and realise efficiencies in the medium term. As an example the Councils currently have the resources necessary to support the democratic services and processes including council and committee agendas and minutes. Under a new entity there is likely to be a duplication of democratic resources and the new entity would need to determine the number of resources required to deliver this service. The expected efficiencies relative to this area are realised in the Corporate Services section. Based on our previous experience we would expect resource efficiencies in a council of this size of between 30% and 40%, however having regard to the asset base and size of the comparator council, we do not expect to realise these full benefits in this merger. The reduction in resources is only likely to occur in the medium term due to the form of employment contracts, however having said that, there is the potential not to replace positions vacated in the short term if they are considered to be duplicate positions under the new entity (natural attrition policy). The expected efficiencies relative to this area are realised in the Corporate Services section. Morrison Low 31

114 Under these assumptions, we have assumed a reduction in these resources based on a benchmark to similar sized councils to the merged entity. 2 Corporate services In the formation of a new entity there is likely to be a reduction in staffing numbers across the corporate services in the medium term. The corporate services provides most of the organisational and corporate activities such as finance and accounting, human resources, communication, information technology, legal services, procurement, risk management, and records and archive management. Across the councils there is likely to be some element of duplication so there should be efficiency opportunities as it relates to administrative processes and staffing levels. The potential opportunities for efficiency within the corporate services category are summarised in the table below along with the indicative timing of when the efficiency is likely to materialise. Staff Duplicated Services Contract/ Procurement Information Technology On Costs Transition Period Short Term (1 to 3 years) Medium Term (3 to 5 years) Natural attrition (voluntary) Natural attrition (voluntary) Streamlined management (Tier 3) Natural attrition (voluntary) Finance ICT Communications Human Resources Records Customer Services Risk Management Staff associated costs e.g. HR, accommodation computers, vehicles Staff associated costs e.g. HR, accommodation computers, vehicles Long Term (6 years plus) 2.1 Rationalisation of duplicate services Consistent with the dis-establishment of two councils and the creation of a single entity, there are a number of back office duplicated services that would be replaced, standardised and simplified. The rationalisation and streamlining of back office services means that there would an opportunity to rationalise financial reporting, business systems, administrative processes and staff numbers. Examples for the rationalisation of corporate services include: Finance - A reduction in finance service costs with the rationalisation of financial reporting and financial planning with a single, rather than two Resourcing Strategies, Long Term Financial Plans, Asset Management Strategies, Workforce Management Plans, Annual Plans and Annual Reports needing to be prepared, consulted on and printed. In addition the centralisation of rates, accounts receivable, accounts payable and payroll, including finance systems will reduce resourcing requirements and costs. Morrison Low 32

115 Human Resources (HR) The size of the HR resource would be commensurate with the number of FTEs in the new entity based on industry benchmarks. The number of HR resources would be expected to reduce proportionately to the reduction in organisational staff numbers. Communications The resourcing would be expected to reduce since there would be a single website and a more integrated approach to communication with less external reporting requirements. Customer Services No reduction in the front of house customer services have been assumed on the basis that all existing customer service centres would remain operative under a single entity and the existing levels of service would be retained. However, there is potential to reduce the number of resources in the back office such as the staffing of the call centre. The potential efficiency in the corporate services category is difficult to determine largely due to the fact that ICT accounts for a large cost through the transition into the new entity both in terms of resources and actual cost. However, it is expected that ICT would be implemented in the medium term and due to existing employment contracts, the corporate service efficiencies would therefore only be realised in the medium term. The realisation of efficiencies in corporate services is considered to be achieved by natural attrition (see 2.3 below) Areas for further efficiency Based on the experience from previous amalgamations in local government, there are other areas where we would expect there to be opportunity to achieve efficiencies. These areas include management, staff turnover, procurement, business processes, property/accommodation, waste and works units. Staff Duplicated Services Contract/ Procurement Information Technology On Costs Transition Period Short Term (1 to 3 years) Medium Term (3 to 5 years) Staff turnover Streamlined management (Tier 3 & 4) Property/ accommodation, Works Units Printing, stationary, ICT systems/ licences, legal ICT Benefits ICT Resourcing Waste ICT Benefits Staff associated costs e.g. HR, accommodation, computers, vehicles Staff associated costs e.g. HR, accommodation, computers, vehicles Long Term (5 years plus) 2.2 Management (we have assumed no savings) The extent of efficiencies for Tier 3 and Tier 4 is directly dependent on the organisational structure of the new entity, types of services and the manner in which these services are to be delivered in the future, i.e. delivered internally or contracted out. It is also affected by the relative classification of senior staff as Directors or Managers. The Auckland amalgamation resulted in an FTE reduction of almost 60% 2 across the total Tier 1 through to Tier 4 positions. While Section 1 addresses the Tier 1 and Tier 2 efficiencies, there is further opportunity for efficiencies in regard to the Tier 3 and Tier 4 managerial positions although these would only be realised in the medium term. Morrison Low 33

116 2.3 Staff turnover ($3.7M cumulative in 3 years) NSW Local Government Median rates of turnover are reported at 8% 21 and, on the basis that the new entity adopts a natural attrition policy not to fill positions in the short term, there is an estimated annual efficiency based on applying a modest 1.45% natural attrition. Port Stephens Council turnover is very low (4.81% in ) and Council has been critically reviewing staff numbers through its sustainability review program for the past 5 years. This has led to a reduction in total staff numbers as the sustainability program requires us to benchmark against best practice service delivery models. Dungog Shire Council has had limited scope to reduced their FTE. Based on this data the net turnover rate in year 1 to year 3 of the merger is likely to be in the vicinity of 1.45%. 2.4 ICT benefits ($200K) Without a full investigation into the current state of the two councils ICT infrastructure and systems, and without an understanding of the future state the ICT benefits cannot be quantified at this stage. However, benefits would include improved customer experience, operational cost saving and reduced capital expenditure, higher quality of IT service and increased resilience of service provision. It is also necessary to model a value for the benefits to balance the costs that have been allowed for in the transition. The operational cost savings and reduction of capital expenditure would be as a direct result of rationalising the number of IT systems, business applications, security and end user support from two councils to a single entity. The cost of IT and the number of staff resources required to support it would be expected to decrease over time. FTEs are assumed to reduce over time in line with reduced IT applications and systems. Without the ICT FTE remuneration for the two councils, the amount of efficiency is unable to be determined at this time. An allowance of 5% of the IT investment has been allowed for, arising in the long term. 2.5 Materials and contracts ($0K) There is usually an opportunity for efficiencies in procurement created through the consolidation of buying power and the ability to formalise and manage supplier relationships more effectively when moving from two councils to one. Any estimate needs to take into account that the councils currently engage in some collective procurement, including through Hunter Councils and panel contracts. In addition Dungog Council already outsources or uses shared service type arrangements for the delivery of many services. The increased scale and size of the infrastructure networks managed by the merged council can lead to opportunities to reduce operational expenditure through making better strategic decisions (as distinct from savings arising from procurement). However, after consultation with Dungog management and Port Stephens procurement staff, it is considered that both councils currently enjoy considerable purchasing benefits that are unlikely to be improved through a merger. The distances between depots also limits network based procurement. Based on the analysis during the project and our experience the combined savings have been modelled in the short term at 0% NSW Local Government HR Metrics Benchmarking, Local government NSW Morrison Low 34

117 2.6 Properties (we have assumed no savings) There is an opportunity to rationalise and consolidate the property portfolio through assessing the property needs of the new entity and disposing of those properties no longer required for council purposes. The rationalisation of buildings in the first instance is likely to be corporate accommodation associated with the reduction in staff. Other obvious areas would include the work depots. The councils have a combined buildings portfolio of over $112M and the merged council it is assumed that the council would not dispose of any building assets in the medium term. 2.7 Works units Staff (we have assumed no savings other than through natural attrition) Based on our experience of reviewing a large number of works units across NSW, normally we would be able to find savings through reorganisation of the unit. However, given the sparse geographical area of the merged council, small Dungog outside workforce and the use of external contract resources we think it reasonable to assume no reduction in staff across the works areas in the medium term other than through natural attrition. Plant and Fleet ($500K savings) Based on our experience of reviewing a large number of works units across NSW, most councils have significantly more plant and equipment than reasonably required to undertake their day to day functions. As such, it is reasonable to assume that a reduction in plant and fleet in the order of 5% would be achievable should there be an amalgamation of councils. 3 Services and service levels Typically, merged councils see an increase in staff associated with rises in services and service levels. Research conducted for the Independent Review Panel noted that each of the councils involved in the 2004 NSW mergers had more staff after the merger than the combined councils together 22 and an average over the period of 2002/3 to 2010/11 of 11.7%. An allowance has been made for a 2% increase in staff from year 4 onwards (i.e. after the period of natural attrition). 4 Transition costs The formation of the new entity from the current state of the two councils to one will require a transition to ensure that the new entity is able to function on Day 1. This section identifies tasks to be undertaken and estimates transitional costs that are benchmarked against the Auckland Transition Agency (ATA) results and the costs as estimated by Stimpson & Co. 23 for the proposed Wellington reorganisation. 22 Assessing processes and outcomes of the 2004 Local Government Boundary Changes in NSW, Jeff Tate Consulting 23 Report to Local Government Commission on Wellington Reorganisation Transition Costs, Stimpson & Co., 28 November 2014 Morrison Low 35

118 In the transition to an amalgamated entity there are a number of tasks that need to be undertaken to ensure that the new entity is able to function from Day 1 with minimal disruption to customers and staff. The types of tasks and objectives are summarised in the table below. Governance Workforce Finance and Treasury Business Process Communications Legal Developing democratic structures (council committees) Establishing the systems and processes to service and support the democratic structure Developing the governance procedures and corporate policy and procedures underlying elected member and staff delegations Developing the organisational structure of the new organisation Developing the workforce-related change management process including new employment contracts, location and harmonisation of wages Establishing the Human Resource capacity for the new entity and ensuring all policies, processes and systems are in place for Day 1 Ensuring that positions required are filled Ensuring that the new entity is able to generate the revenue it needs to operate Ensuring that the new entity is able to satisfy any borrowing requirements Ensuring the new entity is able to procure goods and services Developing a methodology for interim rates billing and a strategy for rates harmonisation Developing a plan for continued statutory and management reporting requirements Developing a financial framework that complies with legislative requirements Planning and managing the integration and harmonisation of business processes and systems for Day 1 including customer call centres, financial systems, telephony systems, office infrastructure and software, payroll, consent processing etc. Developing an initial ICT strategy to support the Day 1 operating environment that includes the identification of those processes and systems that require change Developing a longer term ICT strategy that provides a roadmap for the future integration and harmonisation of business processes and systems beyond Day 1 Ensuring that appropriate communication strategies and processes are in place for the new entity Developing a communication plan for the transition period that identifies the approach to internal and external communication to ensure that staff and customers are kept informed during the transition period Ensuring any legal risks are identified and managed for the new entity Ensuring that existing assets, contracts etc. are transferred to the new entity Ensuring all litigation, claims and liabilities relevant to the new entity are identified and managed Property and Assets Planning Services Ensuring that all property, assets and facilities are retained by the new entity and are appropriately managed and maintained Ensuring the ongoing delivery of property related and asset maintenance services are not adversely impacted on by the reorganisation Facilitating the relocation of staff accommodation requirements as required for Day 1 Ensuring the new entity is able to meet its statutory planning obligations from Day 1 and beyond Ensuring that the entity is able to operate efficiently and staff and customers understand the planning environment from Day 1 Developing a plan to address the statutory planning requirements beyond Day 1 Regulatory Services Ensuring that Day 1 regulatory requirements and processes including consenting, licensing and enforcement activities under statute are in place Ensuring that business as usual is able to continue with minimum impact to customers from Da1 and beyond Morrison Low 36

119 Customer Services Community Services Ensuring no reduction of the customer interaction element either face to face, by phone, or in writing from Day 1 and beyond Ensuring no customer service system failures on Day 1 and beyond Ensuring that staff and customers are well informed for Day 1 and beyond Ensuring that the new entity continues to provide community services and facilities Ensuring that current community service grant and funding recipients have certainty of funding during the short term Note - This is not an exhaustive list but provides an indication of the type of work that needs to be undertaken during the transition period. The transition costs are those costs incurred, during the period of transition, to enable the establishment of the new entity and to ensure that it is able to function on Day 1. The estimated transition costs for establishment of a new entity are discussed below. 4.1 Transition body ($2.0M) In the case of Auckland, the ATA was established to undertake the transition from nine councils to one entity. In order to undertake the transition, the ATA employed staff and contractors and it had other operational costs such as rented accommodation, ICT and communications. The cost of the ATA in 2009 was reported at $36M and it is important to note that a substantial number of staff were seconded to the ATA from the existing councils to assist with undertaking the transition tasks. The cost of these secondments and support costs was at the cost of the existing councils and not the ATA. The work undertaken for the reorganisation of Wellington identified the cost of the transition body as $20.6M and on the assumption of FTEs to transition body costs for Wellington, the estimated cost of the transition body for the merger is $2M. This figure may be understated and is dependent on the governance structure adopted and other unknown factors that may influence the cost of the transition body. The cost of staff secondment and support costs from existing councils to the transition body is not included in the cost estimate. 4.2 ICT ($4.0M) The costs associated with ICT for the new entity relate to rationalising the two existing councils ICT infrastructure, business applications, security and end user support for the single entity. We have assumed that Port Stephens ICT systems will form the basis of the new council ICT infrastructure and the cost of including Dungog will be limited to additional hardware and licenses, process design, data migration,, connectivity and training. The full rationalisation of ICT systems based on other amalgamation experience will not occur for Day 1 of the new entity and could take anywhere between three to five years to finalise depending on the complexities of the preferred system. However, there are some critical aspects for the new entity to function on Day 1 including the ability to make and receive payments, procurement and manage staff so there are ICT costs incurred during the transition. Morrison Low 37

120 Estimating the costs for ICT is inherently difficult due to the complexities associated with integrating systems and applications, and not knowing what the new entity may decide on as a future system. With the limited time to undertake this report the ICT costs have thus been based on the proposed Wellington reorganisation. A number of ICT scenarios were explored by Deloitte 24 for Wellington. The estimated cost is split between those costs incurred during the transition and the implementation costs post Day 1 that would be the responsibility of the new entity, giving rise to a range of $3-5.0M. 4.3 Business Process (existing council budget) As part of ensuring the entity is functional on Day 1 is the requirement to redesign the business processes of the existing councils to one that integrates with the ICT systems. This would include the likes of consents, licensing and forms to replace that of the existing Councils. In the case of Auckland, these tasks were largely undertaken by staff seconded to the transition body, the cost of which was not identified as it was a cost picked up by the nine existing councils. 4.4 Branding ($800K) The new entity will require its own branding and, as part of this, a new logo will need to be designed. Once agreed, there will be a need to replace some existing signage of the two councils for Day 1 of the new entity on buildings, facilities and vehicles. In addition, it will be necessary to replace the existing website, staff uniforms, letterheads, brochures, forms and other items. The estimated cost for branding is based on other amalgamation experience. 4.5 Redundancy Costs ($200K) This is based on a reduction from two general managers to one for a merged council, and is based on employment contracts with a redundancy period of 38 weeks, and based on the councils respective annual reports 2014/ Remuneration Harmonisation ($800K) The remuneration and terms and conditions for staff would need to be reviewed as part of the transition as there is currently a variation in pay rates and conditions across the two councils. In order to estimate the cost of wage parity for moving to a single entity, the average employee costs for similar councils have been compared to that of the combined councils as well as between the two councils, and this has been modified to reflect advice from Port Stephens Council. 4.7 Elections There is a possibility of proportional savings in existing council budgets as, instead of two separate elections, there will be one for the new entity. However, the costs of the election are likely to be higher than for future elections as there will need to be additional communication and information provided to voters to inform them of the new arrangements. The costs will also be dependent on the future governance structure, as was the case in the Auckland amalgamation where the election costs were more than the budgeted amounts from the previous councils. For the purposes of the transition costs, no additional budget has been allowed for assuming there is sufficient budget in the two councils. 24 Wellington Local Government Reorganisation Options Transition Costs and Benefits for Technology Changes, Deloitte, September 2014 Morrison Low 38

121 Appendix C Assumptions used in Modelling Council Data General Assumptions The latest actual results have been loaded from the 2013/14 and 2014/15 annual reports, together with the latest available LTFP. Wherever possible, additional data has been sought to enable the key Fit for the Future ratios to be calculated correctly. The following specific comments relate to data received from each Council. Port Stephens Budget data was loaded from the Port Stephens Council LTFP 2025 and additional data was supplied by Council staff to enable the Buildings and Infrastructure Renewals, Buildings and Infrastructure Backlog and Maintenance Ratios to be calculated. The data loaded matches that used for Council s Fit for the Future submission to IPART. There are differences in the three year averages for the first three years due to the inclusion of actual data for 2014/15. Dungog Budget data was loaded from an updated LTFP provide to IPART for Council s Fit for the Future submission. The version supplied matches a revision made following discussions with IPART. The key ratios in the model match those in the LTFP supplied, with the exception that the first three years are influenced by the updated actual 2014/15 data. Employee costs were not disclosed separately in the LTFP so the employee costs per year were calculated based on the change in total employee remuneration stated in the supporting data. Morrison Low 39

122 Appendix D Fit for the Future Benchmarks 25 Operating Performance Ratio Total continuing operating revenue (exc. capital grants and contributions) less operating expenses Total continuing operating revenue (exc. capital grants and contributions) Description and Rationale for Criteria TCorp in their review of financial sustainability of local government found that operating performance was a core measure of financial sustainability. Ongoing operating deficits are unsustainable and they are one of the key financial sustainability challenges facing the sector as a whole. While operating deficits are acceptable over a short period, consistent deficits will not allow Councils to maintain or increase their assets and services or execute their infrastructure plans. Operating performance ratio is an important measure as it provides an indication of how a Council generates revenue and allocates expenditure (e.g. asset maintenance, staffing costs). It is an indication of continued capacity to meet on-going expenditure requirements. Description and Rationale for Benchmark TCorp recommended that all Councils should be at least break even operating position or better, as a key component of financial sustainability. Consistent with this recommendation the benchmark for this criteria is greater than or equal to break even over a three year period. Own Source Revenue Ratio Total continuing operating revenue less all grants and contributions Total continuing operating revenue inclusive of capital grants and contributions Description and Rationale for Criteria Own source revenue measures the degree of reliance on external funding sources (e.g. grants and contributions). This ratio measures fiscal flexibility and robustness. Financial flexibility increases as the level of own source revenue increases. It also gives councils greater ability to manage external shocks or challenges. Councils with higher own source revenue have greater ability to control or manage their own operating performance and financial sustainability. 25 Office of Local Government Fit for the Future Self-Assessment Tool Morrison Low 40

123 Description and Rationale for Benchmark TCorp has used a benchmark for own source revenue of greater than 60 per cent of total operating revenue. All Councils should aim to meet or exceed this benchmark over a three year period. It is acknowledged that many councils have limited options in terms of increasing its own source revenue, especially in rural areas. However, 60 per cent is considered the lowest level at which councils have the flexibility necessary to manage external shocks and challenges. Debt Service Ratio Cost of debt service (interest expense and principal repayments) Total continuing operating revenue (exc. capital grants and contributions) Description and Rationale for Criteria Prudent and active debt management is a key part of Councils approach to both funding and managing infrastructure and services over the long term. Prudent debt usage can also assist in smoothing funding costs and promoting intergenerational equity. Given the long life of many council assets it is appropriate that the cost of these assets should be equitably spread across the current and future generations of users and ratepayers. Effective debt usage allows councils to do this. Inadequate use of debt may mean that councils are forced to raise rates that a higher than necessary to fund long life assets or inadequately fund asset maintenance and renewals. It is also a strong proxy indicator of a council s strategic capacity. Council s effectiveness in this area is measured by the Debt Service Ratio. Description and Rationale for Benchmark As outlined above, it is appropriate for Councils to hold some level of debt given their role in the provision and maintenance of key infrastructure and services for their community. It is considered reasonable for Councils to maintain a Debt Service Ratio of greater than 0 and less than or equal to 20 per cent. Councils with low or zero debt may incorrectly place the funding burden on current ratepayers when in fact it should be spread across generations, who also benefit from the assets. Likewise high levels of debt generally indicate a weakness in financial sustainability and/or poor balance sheet management. Morrison Low 41

124 Asset Maintenance Ratio Actual asset maintenance Required asset maintenance Description and Rationale for Criteria The Asset Maintenance Ratio reflects the actual asset maintenance expenditure relative to the required asset maintenance as measured by an individual council. The ratio provides a measure of the rate of asset degradation (or renewal) and therefore has a role in informing asset renewal and capital works planning. Description and Rationale for Benchmark The benchmark adopted is greater than one hundred percent, which implies that asset maintenance expenditure exceeds the council identified requirements. This benchmark is consistently adopted by the NSW Treasury Corporation (TCORP). A ratio of less than one hundred percent indicates that there may be a worsening infrastructure backlog. Given that a ratio of greater than one hundred percent is adopted, to recognise that maintenance expenditure is sometimes lumpy and can be lagged, performance is averaged over three years. Building and Infrastructure Renewal Ratio Asset renewals (building and infrastructure) Depreciation, amortisation and impairment (building and infrastructure) Description and Rationale for Criteria The Building and Infrastructure Renewals Ratio represents the replacement or refurbishment of existing assets to an equivalent capacity or performance, as opposed to the acquisition of new assets or the refurbishment of old assets that increase capacity or performance. The ratio compares the proportion spent on infrastructure asset renewals and the asset s deterioration. This is a consistent measure that can be applied across councils of different sizes and locations. A higher ratio is an indicator of strong performance. Description and Rationale for Benchmark Performance of less than one hundred percent indicates that a Council s existing assets are deteriorating faster than they are being renewed and that potentially council s infrastructure backlog is worsening. Councils with consistent asset renewals deficits will face degradation of building and infrastructure assets over time. Given that a ratio of greater than one hundred percent is adopted, to recognise that capital expenditures are sometimes lumpy and can be lagged, performance is averaged over three years. Morrison Low 42

125 Infrastructure Backlog Ratio Estimated cost to bring assets to a satisfactory condition Total (WDV) of infrastructure, buildings, other structures and depreciable land improvement assets Description and Rationale for Criteria The Infrastructure Backlog Ratio indicates the proportion of backlog against the total value of the Council s infrastructure assets. It is a measure of the extent to which asset renewal is required to maintain or improve service delivery in a sustainable way. This measures how councils are managing their infrastructure which is so critical to effective community sustainability. It is acknowledged, that the reliability of infrastructure data within NSW local government is mixed. However, as asset management practices within councils improve, it is anticipated that infrastructure reporting data reliability and quality will increase. This is a consistent measure that can be applied across councils of different sizes and locations. A low ratio is an indicator of strong performance. Description and Rationale for Benchmark High infrastructure backlog ratios and an inability to reduce this ratio in the near future indicate an underperforming Council in terms of infrastructure management and delivery. Councils with increasing infrastructure backlogs will experience added pressure in maintaining service delivery and financing current and future infrastructure demands. TCorp adopted a benchmark of less than 2 per cent to be consistently applied across councils. The application of this benchmark reflects the State Government s focus on reducing infrastructure backlogs. Reduction in Real Operating Expenditure Description and Rationale for Criteria At the outset it is acknowledged the difficulty in measuring public sector efficiency. This is because there is a range of difficulty in reliably and accurately measuring output. The capacity to secure economies of scale over time is a key indicator of operating efficiency. The capacity to secure efficiency improvements can be measured with respect to a range of factors, for example population, assets, and financial turnover. It is challenging to measure productivity changes over time. To overcome this, changes in real per capita expenditure was considered to assess how effectively Councils: - can realise natural efficiencies as population increases (through lower average cost of service delivery and representation); and - can make necessary adjustments to maintain current efficiency if population is declining (e.g. appropriate reductions in staffing or other costs). Morrison Low 43

126 Assuming that service levels remain constant, decline in real expenditure per capita indicates efficiency improvements (i.e. the same level of output per capita is achieved with reduced expenditure). Description and Rationale for Benchmark The measure 'trends in real expenditure per capita' reflects how the value of inflation adjusted inputs per person has grown over time. In the calculation, the expenditure is deflated by the Consumer Price Index (for ) and the Local Government Cost Index (for ) as published by the Independent Pricing and Regulatory Tribunal (IPART). It is acknowledged that efficiency and service levels are impacted by a broad range of factors, and that it is unreasonable to establish an absolute benchmark across Councils. It is also acknowledged that council service levels are likely to change for a variety of reasons however, it is important that councils prioritise or set service levels in conjunction with their community, in the context of their development of their Integrated Planning and Reporting. Councils will be assessed on a joint consideration of the direction and magnitude of their improvement or deterioration in real expenditure per capita. Given that efficiency improvements require some time for the results to be fully achieved and as a result, this analysis will be based on a 5-year trend. Morrison Low 44

127 16 PSC Submission Submission

128 60 Council Boundary Review Port Stephens and Dungog Proposal Appendices

129 Appendices C. KPMG Financial analysis Council Boundary Review Port Stephens and Dungog Proposal 61

130 Financial Analysis: Dungog Shire Council Port Stephens Council JUNE 2016

131 COUNCIL PROFILE An overview of the current performance of the two existing councils and the projected performance of the new proposed entity is provided in Figure 1 below. Figure 1: Council profiles Sources: Australian Bureau of Statistics, Department of Planning and Environment, Office of Local Government, Council Long Term Financial Plans. Note: Totals may not sum due to rounding. Estimates of the new council s operating performance and financial position is based on an aggregation of each existing council s projected position as stated in respective Long Term Financial Plans ( ). In addition, it is assumed efficiency savings are generated from a merger, and this is reflected in the projected operating result for the new council. Further details are available in [NSW Government (2015), Local Government Reform: Merger Impacts and Analysis, December.

132 KEY ANALYSIS Financial Benefits of the Proposed Merger Analysis by KPMG in 2015 shows the proposed merger has the potential to generate a net financial saving of $17 million to the new council over 20 years. Gross savings over 20 years will primarily be due to: streamlining senior management roles ($4.1 million); the redeployment of back office and administrative functions ($12.8 million); and efficiencies generated through increased purchasing power of materials and contracts ($5.5 million). In addition, the NSW Government has announced a funding package to support new councils which would result in $15 million being made available should the proposed merger proceed. The implementation costs associated with the proposed merger (for example, information and communication technology, office relocation, workforce training, signage, and legal costs) are expected to be surpassed by the accumulated net savings generated by the merger within a four-year payback period. Overall, the proposed merger is expected to enhance the financial sustainability of the new council through: net financial savings of $17 million to the new council over 20 years; achieving efficiencies across council operations through, for example, the redeployment of duplicated back office roles and administrative functions, and streamlining senior management; establishing a larger entity with revenue that is expected to reach $179 million per year by 2025; an asset base of approximately $708 million to be managed by the merged council; and greater capacity to effectively manage and reduce the $56 million infrastructure backlog across the region by maintaining and upgrading community assets. Local Representation The ratio of residents to elected councillors in each council is different. This reflects the variation in resident populations. While the proposed merger will increase the ratio of residents to elected councillors, the ratio, based on councillor numbers in the existing councils, is likely to be comparable to those currently experienced in other regional NSW councils, such as the City of Coffs Harbour (Table 1). For the purpose of analysis of merger benefits, this proposal has assumed that the new Council will have the same number of councillors as Port Stephens council as this has the largest number of councillors of the two councils covered by this proposal. The Government welcomes feedback through the consultation process on the appropriate number of councillors for the new council. Some councils in NSW have wards where each ward electorate elects an equal number of councillors to make up the whole council. Community views on the desirability of wards for a new council will be sought through the consultation process. Table 1: Potential changes to local representation in Dungog Shire and Port Stephens councils Council Number of councillors Number of residents (2014) Residents per councillor Dungog Shire Council 9 9,108 1,012 Port Stephens Council 10 69,728 6,973 Merged council 10* 78,836 7,884 City of Coffs Harbour Council 9 71,798 7,978 * The Dungog and Port Stephens communities will have an opportunity to shape how a new merged council will be structured, including the appropriate number of elected councillors. Fifteen elected councillors is the maximum number currently permitted under the NSW Local Government Act Source: Australian Bureau of Statistics (2014), Estimated Resident Population; and NSW Office of Local Government, Council Annual Data Returns ( ).

133 Local Economy The local economy is characterised by: levels of household income above the NSW regional average of $65,168, the average household income in Dungog is $69,188 and in Port Stephens it is $67,938; levels of unemployment above and below the NSW regional average rate of 7.3 per cent per annum, with Dungog at 7.0 per cent and Port Stephens at 9.5 per cent. employment growth rates lower than the NSW regional average of 0.6 per cent, with Dungog at 0.5 per cent and Port Stephens experiencing declining employment growth; levels of post-secondary educational attainment (post-school qualifications) around the NSW regional average of 53 per cent, with Dungog at 52 per cent and Port Stephens at 54 per cent; and varied industry sectors across the council areas with agriculture, forestry and fishing the main industry in Dungog Shire and retail trade the main industry in Port Stephens. Both councils also have significant health care & social assistance sectors. Table 2 below provides a snapshot of the local business profile of each council. More than 5,200 local businesses across the region contribute more than 30,300 jobs to the local economy. Table 2: Local business and employment profile Council Number of businesses Local jobs Largest sector Dungog Shire Council 982 3,721 Agriculture, Forestry & Fishing Port Stephens Council 4,315 26,608 Retail Trade Merged council 5,297 30,329 Retail Trade Source: Australian Bureau of Statistics (2014), Business Counts and Employment by Industry. Population and Housing The new council will be responsible for infrastructure and service delivery to more than 97,000 residents by Like a number of regions across NSW, the Dungog and Port Stephens communities are experiencing modest population growth and the region will also experience the impacts of an ageing population over the next 20 years (Figure 2). Figure 2: Change in population distribution, by age cohort (2011 v 2031) Source: NSW Department of Planning & Environment (2014), NSW Projections (Population, Household and Dwellings).

134 Figure 3: Comparison of councils' socio-economic profile Source: Australian Bureau of Statistics (2011), SEIFA by local government area. In comparison with the rest of regional NSW, the Dungog and Port Stephens communities have relatively similar levels of advantage and disadvantage from a socio-economic standpoint. The Socio-Economic Index for Areas (SEIFA), illustrated in Figure 3, measures a range of factors to rate an individual council s relative socio-economic advantage. Each council has a SEIFA score which is above the regional average but below the NSW average. This reflects the characteristics across the communities in relation to, for example, economy, household income, education, employment and occupation. Table 3 outlines the current mix of housing types across the region. As with most regional areas across NSW, the dominant forms of dwelling across the Dungog and Port Stephens region are separate houses. Table 3: Dwelling types in the Dungog and Port Stephens region (total number and per cent) Dwelling type Dungog Shire Council Port Stephens Council Separate house 3,685 96% 23,182 76% Medium density 96 3% 5,196 17% High density - - 1,399 5% Other 41 1% 736 2% Total private dwellings 3,823 30,513 Source: Australian Bureau of Statistics, Census (2011), Dwelling Structure by local government area.